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Shriram Finance – Giant in making

Updated: Feb 10, 2023

Company Name – Shriram Finance Limited (Shriram Finance)

Current Share Price – INR 1,279 (February 3, 2023)

Market Cap – INR 47,891 cr


1. What is interesting about the stock?

Non-Banking Finance Company (NBFC) is a difficult business in India – constant pressure from the banks for good customers and from the Reserve Bank of India given the number of blow-ups in the industry like the recent ones: ILF&S, DHFL, etc. So, NBFCs need a competitive advantage to help survive this onslaught for a long period. We have a few successful NBFCs like HDFC, M&M Financial Services, and Bajaj Finance. HDFC understands housing finance better than anyone else. M&M Financial Services caters to rural areas where banks can’t reach. Bajaj Finance cracked a model to give consumer finance loans (EMIs) for high-value items at the time of purchase. Shriram Finance is another such NBFC that understands second-hand vehicle finance better than any other bank or NBFC in the country.

A bit of background on Shriram Finance.

Shriram Finance Limited is the flagship company of the Shriram group which has a significant presence in Consumer Finance, Life Insurance, General Insurance, Housing Finance, Stock Broking, and Distribution businesses. Shriram Finance is India’s largest retail asset financing NBFC with Assets under Management (AUM) of INR 1.7 lakh crore. Recently Shriram City Union Finance Limited (SCUF) and Shriram Capital Limited merged with Shriram Transport Finance Company Limited and were subsequently renamed Shriram Finance Limited in December 2022.

Established in 1979, Shriram Finance is a finance provider catering to the needs of Small Road Transport Operators and small business owners and is a leader in organized financing of pre-owned commercial vehicles and two-wheelers. It has a vertically integrated business model and offers a financing number of products which include passenger commercial vehicles, loans to micro and small and medium enterprises (MSMEs), tractors, gold, personal loans, and working capital loans, etc. Over the last 43 years, it has developed strong competencies in the areas of Loan origination, valuation of pre-owned commercial vehicles and other assets, and collections. It has a pan India presence with a network of ~ 2,900 outlets and an employee strength of ~ 61,000 servicing ~70 lakh customers.

Segment-wise AUM of the Company is (1 bn = 100 cr):

Most of the AUM and branch is focused on semi-urban and rural areas. Branch and AUM distribution in Q3FY23 is:

There could be several reasons for the restructuring of the group. While demystifying the ownership to a large extent, the revamp has pushed the Shriram group into a significant standing in the NBFC (non-banking finance company) field. The scale advantage arising out of this exercise is huge. Also, there are possibilities of cross-selling as there was an overlap between Shriram Transport and Shriram City Union Finance customers.

Succession planning has been ailing the Company for a while. Piramal bought a strategic stake in the group to help in the succession planning. But, it didn’t work out due to differences in working culture.

Shriram Ownership Trust is now the promoter of the overhauled Shriram group. Founder Thyagarajan gave up control of the group to the Shriram Ownership Trust in 2006, through which 40 top management officials received a stake of 1-2.5% stake in the group. Shriram Finance is a board-managed company.

Most of the large NBFCs will need retail funding to drive growth and lower the cost of funding. This is one of the reasons for HDFC to merge with HDFC Bank. Shriram Finance would also have to follow the trend in the medium-to-long term – no wonder there was talk of merging SCUF with IDFC Bank in 2017.

Why invest in Shriram Finance?

  • Diversified NBFC – leadership position in used CV financing

  • Loyal customer base

  • Experienced management team

  • Cross-selling could drive incremental revenue and profitability

2. Key Historical Financials

  • Appointed date for the merger was April 1, 2022, so the financials before the date are not comparable

  • Company had strong revenue and profit growth in Q2FY23 vs Q1FY23 and further strong profit growth in Q3FY23

  • NPA at 3.2% in Q3FY23 – it is high but needs to be seen in the context of the end-user segment which leads to high NIMs (~8.5%)

  • ROA and ROE were healthy in Q3FY23

  • Book value per share of INR 1,132 as of December 31, 2022

3. What is my view on company valuation?

Company trades at a P/BV of 1.13x vs other NBFC players which trade north of a P/BV of 2x. Shriram Finance trades at P/E (annualized 9MFY23) of 8.3x vs Cholamandalam at 26x, Bajaj Finance at 34x, Sundaram Finance at 22x, and M&M Financial Services at 15x.

So, the Company is quite cheap compared to the other NBFC players. With the CV cycle turning and increased spending in the economy, investors can evaluate this Company for long-term investment.

Management expects a 15% growth in the loan book in the next few years. Profit growth could be higher due to efficiency in borrowing cost (esp on SCUF book) and cost synergies.

However, shareholders like Piramal and TPG will want to exit the Company creating pressure on the share price shortly. They had tried to exit in 2019 but the transaction couldn’t be consummated.

4. What are the risks to the investment analysis?

Risks to the analysis are:

  • Target customers primarily comprise the high-yielding borrower segment with modest credit profiles. These customers generally have a limited credit history and restricted buffer to absorb income shocks. Hence, the inherent credit risk in the portfolio is high.

  • Borrowing cost is higher compared to peers


About the Author

I have over 17 years of experience in venture capital, private equity, and investment banking in India and the Middle East across various sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.

I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).

I am an Insignificant Investor in the public market and co-founder of SocInvest.


I have had no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days. However, I could initiate a position in the stock so the opinion could be biased. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.

I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.

I have used publicly available information while writing this article.

1 comment

1 Comment

Feb 06, 2023

i can confidentally say that the are gonna beat all other players in the second hand vechile market . even other players are giving the bank seized vechile to auction sriram city mall . where they have created a big unsung startup in this segment. if possible shri ram city mall is created a startup then i promise it would be less then cars 24 and cardekho . where they only sell second hand cars . but in Shri Ram city mall they have huge nettwork from 2 whellers to 10 whellers .

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