Shriram Finance Stock Jumps 5% After Sale of Housing Finance Arm to Warburg Pincus

The stock price of Shriram Finance witnessed a surge of over 5 percent, reaching Rs 2,419 per share on May 14. This spike came in following the board’s approval of the complete sale of its housing finance arm, Shriram Housing Finance (SHFL), to the US-based private equity giant Warburg Pincus for a hefty sum of Rs 4,630 crore. Despite the excitement surrounding this significant M&A deal within the housing finance sector, brokerage opinions on its potential impact on the non-bank lender remained divided.

Morgan Stanley has an optimistic outlook on Shriram Finance, issuing an ‘overweight’ rating with a target price set at Rs 3,050 per share. According to their assessment, the transaction’s impact on the company’s valuation would be inconsequential. They emphasised that the housing finance subsidiary represents just 4 percent of Shriram Finance’s Sum of the Parts (SOTP) valuation.

In contrast, CLSA analysts projected a gain of Rs 2,350 crore from the transaction, equivalent to 3 percent of the market capitalisation. However, they highlighted that Warburg’s valuation of the company, at 2.4x price-to-book (PB) ratio and 21x price-to-earnings (PE) ratio, stands lower than the multiples attributed to peers such as Aavas Financiers, Home First Finance, and Aptus. Despite this, CLSA maintained an ‘outperform’ rating on the stock, with a target price of Rs 2,800 per share.

Under the terms of the deal, Warburg Pincus will acquire the stake through its affiliate Mango Crest Investment from all existing shareholders. The proposed transaction is valued at Rs 4,630 crore for equity and convertible instruments of SHFL, subject to regulatory approvals.

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Currently, Shriram Finance holds an 84.82 percent stake in Shriram Housing Finance, while the remaining 14.94 percent is owned by Valiant Capital Management, a private equity firm based in San Francisco, California. As part of the agreement, Valiant will also completely divest its equity stake to Warburg Pincus.

In the latest financial quarter (Q4FY24), Shriram Finance witnessed a substantial year-on-year (YoY) increase in its consolidated net profit, which rose by 57 percent to Rs 2,021 crore. Meanwhile, the total income surged by 24 percent YoY to Rs 9,918 crore.

There was also a notable improvement in the company’s asset quality during the quarter, with the gross non-performing assets (NPA) decreasing to 5.45 percent in Q4FY24 from 6.21 percent in the corresponding period last year. Similarly, the net NPA stood at 2.7 percent in Q4FY24, down from 3.19 percent in Q4FY23.

Source: moneycontrol

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