Sale of housing finance unit to help Shriram Finance augment growth capital: S&P Global

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Divestment of Shriram Finance’s entire stake in its housing finance subsidiary is capital accretive for the NBFC and will increase capital available for faster growth, according to S&P Global.

Shriram Finance, on May 13, approved the sale of an 84.8 per cent stake in Shriram Housing Finance to an affiliate of PE firm Warburg Pincus, company Mango Crest Investment for ₹4,630 crore.

“The capital position of Shriram Finance will strengthen further with the disposal of the subsidiary. Its regulatory tier-1 ratio was 19.6 per cent as of March 31, 2024, well above the minimum requirement. We believe SFL will channel the additional capital to maintain strong growth in its core businesses of financing commercial vehicles and small businesses.”

Earlier this week, Executive Vice-Chairman Umesh Revankar told businessline that the profit from the sale of the business is ₹1,360 crore, which will be used to improve the net worth and capital ratio, the latter of which is expected to rise by nearly 1 per cent.

Revankar guided for AUM growth of 15 per cent in FY25, driven by the passenger vehicle and SME loan segments. He added that the focus is on improving opex, profitability, and portfolio quality, in addition to digital process innovation.

S&P Global expects the NBFC to maintain credit growth of about 20 per cent, without raising fresh equity. The risk-adjusted capital ratio is seen broadly stable at more than 13 per cent over 2025 and 2026, compared with S&P Global’s estimate of 13.5 per cent as of March 2024.

The sale will help the parent company focus on higher profitability, given that Shriram Housing has been growing at over 70 per cent per year and needs capital to sustain this growth, the global agency said. The housing financier’s tier-1 capital ratio was 16.5 per cent as of March 2024.

“We don’t expect the transaction to have a material impact on Shriram Finance’s credit profile, given Shriram Housing’s small contribution to the group. As of March 2024, it contributed less than 1 per cent to the group’s equity and 4-5 per cent to the group’s revenues and assets,” S&P Global said.

Shriram Finance reported return on assets (RoA) of 3.1 per cent in FY24, significantly higher than Shriram Housing Finance‘s 2.2 per cent.