Following the merger announcement of Shriram City Union Finance Ltd (SCUF) and Shriram Capital Ltd (SCL) with Shriram Transport Finance Co (STFC) announced on Monday, HDFC Securities is upbeat on the stocks of Shriram Transport Finance Company. According to the brokerage, this NIFTY stock will reach a target price of Rs. 1,552 from its current market price of Rs. 1,381.
The brokerage’s take on Shriram Transport Finance Company
In its latest report, the brokerage has analysed that "Given the adverse outcome of its previous attempt at re-jigging the group structure (through a merger with erstwhile IDFC Bank in 2017), the Shriram Group appears to have settled for the structure with the highest likelihood of approval from the concerned regulators, mainly the RBI."
As per the research report "The announced merger is unlikely to meaningfully address the growth conundrum in SHTF, given the highly cyclical nature of the industry and size constraint (AUM at INR 1.2trn, 6% CAGR during FY18-FY21). The limited overlap across entities and an inherently modest credit profile of borrowers at both franchises are also likely to limit the rating upside. Relative to peers, SHTF has a funding cost disadvantage (>100 bps) that is unlikely to reverse merely due to the merger."
According to the brokerage "The Shriram Group's strategy to drive growth in the merged entity through cross-selling to a larger customer base appears too simplistic and ambitious. In addition, the super-app strategy to improve product penetration across the customer base entails significant execution risk. We see no evident right-to-win for the merged entity across either of these strategies."
HDFC Securities has further added that "With AUM at >INR 1.5trn, Shriram Finance is likely to be categorised as a large NBFC, entailing bank-like supervision under the RBI's proposed new framework. With management bandwidth likely to be incrementally consumed in seeing the merger through, we see a high likelihood of CIFC cherry-picking assets and indirectly benefiting from opportunistic market share gains in the used vehicles segment (90% of AUM for SHTF)."
Why HDFC Securities Has A “BUY” Call Rating On The Stock?
The brokerage has claimed that "Shriram Group announced the long-awaited re-jig of its group structure; while the non-lending subsidiaries (general insurance and life insurance) would be placed outside the merged entity, Shriram City Union Finance (SCUF) and Shriram Capital are slated to be folded into Shriram Transport (SHTF) to form Shriram Finance (the proposed merged entity). At yesterday's closing price, the share-swap ratio indicates a favourable ratio for SCUF."
The reason behind the brokerage is bullish on the shares of Shriram Transport Finance Company is that "While the re-jig was inevitable, we believe the proposed merger is unlikely to generate meaningful revenue or opex benefits, and the super-app strategy entails significant execution risk. Despite the high likelihood of regulatory clearance, our forecasts for FY22-FY23 remain unchanged. We maintain ADD with an unchanged target price of INR1,552; in fact, we expect CIFC, our conviction pick, to benefit indirectly from the merger overhang as SHTF prioritises integration over its flagship business."
The stock has been picked from the brokerage report of HDFC Securities Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.