Shriram Finance shares fall 2% on profit-booking after 6-day gains over MUFG deal

Shriram Finance share price

• Shriram Finance shares fell 2% after profit booking post six-session rally
• MUFG Bank to acquire 20% stake in Shriram Finance for Rs 39,600 crore
• Shriram Finance will remain an NBFC; no plans to become a bank

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The shares of Shriram Finance fell around 2 percent on December 26 as investors may have resorted to profit booking at elevated levels, after a six-session gaining streak.

The shares of the NBFC dropped to Rs 957.30 apiece in the morning of Friday. This comes after the stock surged 16 percent in six sessions to hit a fresh 52-week high of Rs 983.7 per share on Wednesday.

Shriram Finance-MUFG deal:

Shriram Finance on December 19 announced that MUFG Bank will acquire 20 percent stake in the NBFC for Rs 39,600 crore ($4.4 billion) through preferential allotment of equity shares. This marks the largest FDI in India's financial sector.

The floor price for the preferential issue was set at Rs 840.83 per share, with MUFG set to acquire 47.11 crore equity shares.

Shriram, India's second-biggest non-bank lender after Bajaj Finance Ltd., operates businesses across urban and rural areas, focusing on loans for commercial vehicles, tractors and passenger cars.

Brokerages expect the deal to strengthen Shriram Finance’s balance sheet, bolster growth prospects and potentially pave the way for a credit rating upgrade. They have raised target prices and remain broadly positive on the long-term outlook, despite near-term earnings dilution from the expanded equity base.

MUFG won't increase stake in Shriram Finance above 20%:

While speaking at a joint press conference with the NBFC’s management earlier this week, Yasushi Itagaki, senior managing corporate executive and Group COO-I at MUFG, said that the Japanese financial company is happy with its status as a “significant minority stakeholder” in Shriram Finance. “Right now, we have no intention of going above 20 percent,” he added.

The executive from the Japanese conglomerate added that it has "no interest in investing in any other arms of Shriram Group". "We respect local branding and names, so Shriram Finance's name will remain," he further said.

Umesh Revankar, Executive Vice Chairman of Shriram Finance, said that the company becoming a bank is not something that the management sees happening right now.

"Getting a banking license is not under discussion at all. We prefer to remain where we are. Since India is growing very fast, it gives us a large opportunity to do retail lending and there is enough scope to expand with whatever we have built," he said, adding that no change is expected structurally in the way they manage business after the said stake acquisition by MUFG is completed.

Revankar believes there is enough scope and opportunity for Shriram Finance to remain as an NBFC and keep growing. "Being an NBFC gives you the advantage of customisation. It is better to remain in this particular structure for as long as possible," he added.

Shriram Finance share price:

Shriram Finance shares have gained around 11 percent in the past five days, and over 12 percent in the past one month. The stock is up around 37 percent in the past six months.

Its P/E ratio currently stands at 19.09.

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