However, not all is rosy. Between February 2014 and February 2023, the stock delivered 0% returns—no growth for nine long years.
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This is a textbook case of how equity returns can be unevenly distributed over time. Here’s a deeper dive into the story behind these numbers.
From chit funds to commercial vehicles
Shriram Finance traces its origins to the 1970s, beginning as a chit fund business. Chit funds, structured as rotating savings and credit schemes, pool contributions from around 20 members, distributing the funds through a lottery or auction system. Founded in 1974, Shriram Chit Funds institutionalized this concept, offering small businesses a reliable way to access credit and savings.
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This exposure gave the company a deep understanding of the financial needs of the unbanked, revealing a significant market gap: small truck operators lacked access to formal credit. Recognizing the opportunity, Shriram expanded into financing commercial vehicles, focusing heavily on the pre-owned segment.
Targeting truck operators with irregular cash flows, the company structured loans with flexible repayment options. Shriram’s deep network from its chit fund operations helped it manage non-performing assets (NPAs), even while lending at 14-18% interest rates, reflecting the higher risk profile of customers.
By FY22, Shriram Finance had become a leader in the pre-owned commercial vehicle (CV) market, with ₹1.27 trillion worth of assets under management (AUM). Yet, the road leading up to FY22 was far from smooth.
The pre-owned CV business is highly cyclical, as the fortunes of small fleet operators depend on freight demand, which is closely tied to the broader economy. Making things more challenging, Shriram’s customer base consists of new-to-credit borrowers, those with no prior credit history—justifying the high-interest rates.
During economic downturns, these risks surface. Gross NPAs (GNPA)—loans unpaid for over 90 days—can soar to 10% of total loans. This has played out at Shriram Transport, where high NPAs and rising credit costs have dragged the business since FY16.
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Between FY19 and FY22, Shriram Finance’s earnings per share (EPS) shrank from ₹113 to ₹100. Return on Equity (ROE), a key profitability metric, fell from 17.4% to 11.4%, while AUM grew at a modest 5% CAGR. But the stock underperformed for nearly nine years, between 2015 and 2023, weighed down by strategic missteps—primarily with Piramal Enterprises.
The Piramal chapter: Misaligned goals
In May 2013, Piramal Enterprises acquired a 9.9% stake in Shriram Transport Finance for ₹1,650 crore, alongside a 20% stake in Shriram Capital for ₹2,014 crore and a 10% stake in Shriram City Union Finance (SCUF) for ₹790 crore. The total investment amounted to ₹4,500 crore. In 2015, Ajay Piramal became chairman of Shriram Capital, the holding company of the Shriram Group.
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Piramal’s goal was to integrate its lending business with the Shriram Group and secure a banking license. When this failed, it explored a merger with IDFC Ltd, which had obtained a banking license, but that deal also fell through. IDFC eventually merged with Capital First, forming IDFC First Bank.
The collaboration with Piramal was problematic from the start. It shifted focus away from Shriram’s core business and revealed cultural differences. Shriram’s unique ownership model, where employees hold shares through the Shriram Owners Trust (SOT), clashed with Piramal’s top-down, a relatively hardliner approach.
To an extent, the poor business performance highlighted above, reflects these issues.
Exit strategy and the merger plan
By June 2019, Piramal sold its 9.9% stake in Shriram Transport for ₹2,300 crore, signalling the beginning of its exit. In October 2019, Ajay Piramal confirmed to Mint, “One thing is clear that we will exit. Which is the best way forward for Shriram, that we are discussing.”
To facilitate Piramal’s complete exit, a merger of Shriram Group companies was proposed. The merger aimed to simplify the group’s structure, reduce costs, and smoothen Shriram Transport’s earnings—unlocking value that had eluded shareholders for six years by then.
However, the process stalled when the pandemic struck, delaying the exit by three more years and prolonging the stock’s underperformance. Finally, in June 2023, Piramal sold its remaining 8.3% stake in Shriram Finance (post-merger) for ₹4,800 crore. The market welcomed the move, with the stock surging from ₹1,400 in June 2023 to ₹3,400 by October 15, 2024—a 143% jump.
A leaner, more focused NBFC emerges
Following the merger’s approval in April 2022, Shriram Finance emerged as a more focused, diversified NBFC with a committed management team and employees maintaining “skin in the game” through the Shriram Owners Trust. The fundamentals followed suit:
EPS: Jumped from ₹100 to ₹196 per share
ROE: Improved from 11% to 16%
GNPA: Declined from 7.1% to 5.85% in the commercial vehicle segment, and 5.39% overall
This operational revival also led to a significant re-rating of the price-to-book ratio, from 1.5 to 2.6, driving a remarkable 91% CAGR over the past 18 months.
What lies ahead for Shriram Finance?
Shriram Finance has staged an impressive turnaround in both business performance and stock price. But as the dust settles, the question is—what’s next?
With an AUM of ₹2.47 trillion as of Q1 FY25, 62% of Shriram’s loans are concentrated in vehicle financing. Of that, 44% is CVs and 18% in passenger vehicles. MSMEs account for another 11.3%. This means 73% of its AUM remains tied to cyclical segments—those that fluctuate with economic activity. While the company has become more resilient post-merger, this cyclical exposure still poses risks during economic slowdowns, potentially keeping earnings flat or even declining for extended periods.
The management has indicated no immediate plans to alter the AUM mix.
A September 2024 Crisil report underscores that Shriram Finance is expected to “retain its predominant position in the pre-owned commercial vehicle and SME segments…because of the strong and sustainable competitive advantage of the company.” The report further noted that the company faces limited competition from organized financiers, including banks, given the risk profile of the products and customer base it serves.
The recent sale of Shriram Housing Finance to Warburg Pincus for ₹4,600 crore reflects this strategic focus. The sale proceeds are expected to further strengthen the capital base, reinforcing the company’s commitment to its core segments.
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The recent sale of Shriram Housing Finance to Warburg Pincus for ₹4,600 crore reflects this strategic focus. The sale proceeds are expected to further strengthen the capital base, reinforcing the company’s commitment to its core segments.
Challenges ahead
Despite the progress, Shriram Finance must address several challenges:
Higher cost of funds: Its incremental borrowing cost stands at 8.8%, higher than peers like Cholamandalam (7.3%) and Mahindra & Mahindra (7.8%-8%).
NPA management: While GNPA ratios have improved, they remain higher than its closest competitors, signalling the need for further improvement.
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Another concern is slowing vehicle sales. While management is targeting 15% AUM growth for FY25, early signs of weakening demand in commercial vehicles and two-wheelers suggest growth expectations may need to be tempered.
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ROE and valuation: The road to improvement
Shriram Finance has shown impressive ROE growth, from 10.4% in FY22 to 15.0% in FY24. However, it still lags behind top peers like Cholamandalam and Sundaram Finance.
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Its current price-to-book ratio (2.6X) reflects the post-merger revival, but further re-rating depends on sustained improvements in key metrics such as ROE, GNPA, and EPS growth.
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Continued progress on these fronts will be essential to drive future stock performance, as well as justify any further expansion in valuation multiples. Investors will need to keep a close watch on operational performance and macroeconomic conditions to assess whether Shriram Finance can maintain its upward trajectory.
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Note: This article relies on data from www.Screener.in. In instances where data was unavailable, we used alternate, widely accepted sources.
The purpose of this article is to present interesting charts, data points, and thought-provoking opinions. It is NOT a recommendation. If you are considering an investment, please consult your financial advisor. This article is intended for educational purposes only.
About the Author: Rahul Rao has been investing since 2014. He has conducted financial literacy programmes for over 150,000 investors, helped establish a family office for a 50-year-old conglomerate, and worked at an AIF focusing on small and mid-cap opportunities. Rahul evaluates stocks through an evidence-based, first-principles approach, steering clear of comforting narratives.
Disclosure: The writer and his dependents do not hold any position in the stocks, commodities, cryptocurrencies, or other assets discussed.