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With the Shriram Group consolidating its various finance businesses under Shriram Finance, Founder R. Thyagarajan is bullish about future growth prospects

By: Krishna Gopalan
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An old wrist watch rests on the table, as also a small pocket diary with a pen sticking out. R. Thyagarajan gently makes a few notes and smiles before starting the conversation. At 85, the mind is laser sharp, though he jokingly says age is slowly catching up.

We are sitting in his large yet modest office called Shriram Towers in the crowded suburb of T. Nagar in Chennai. A low-profile man, who says he is comfortable with anonymity and western classical music in equal measure, Thyagarajan spends a few hours at work each day “only to give a sense of direction and nothing else”. It was in the mid-1970s when he, with a few friends, set up a chit fund business before moving into lending with the objective of catering to the underserved. Almost five decades later, Shriram is a name in the ultra-competitive world of financial services. Its logo of the suited man holding a briefcase and one finger pointing skywards is easily recognisable in south India and, now, across the country as well.

It just happened that we started off in the commercial vehicles business since access to credit there was limited. Over time, it has extended to non-transport areas such as SMEs. The customer is most important in this entire piece.

R. Thyagarajan
Chairman
Shriram Group


The group has been in the news for a while with high-profile private equity funds such as ChrysCapital and TPG having made investments, apart from the likes of industrialist Ajay Piramal. Over time, Shriram has moved across the spectrum of lending to truckers, small and medium enterprises, as well as individuals for a host of needs. Building on that base of borrowers, it moved into insurance as well, a sector that Thyagarajan is extremely bullish about. Last December, it was time to unveil a new entity, Shriram Finance—a result of a merger between Shriram Capital, Shriram City Union Finance and Shriram Transport Finance. Claiming to be the largest retail non-banking finance company (NBFC) in India, with combined assets under management (AUM) of over Rs 1.5 lakh crore and a distribution network of 3,500 branches, the merged entity brings together all the lending segments, among which are commercial vehicles, two-wheelers, personal loans and small enterprise finance.

It is a journey towards a new-look Shriram where synergies of the merger are expected to bear fruit. At the same time, insurance, which is not being merged, will be the big story. In many ways, this could be the tipping point for the group.

Synergy at the core

How things get discovered quite by chance is a tale often narrated in business. When the senior management at Shriram City Union Finance (SCUF) sat down for a routine review last year, an unexpected bit of information popped up. On an average, the company financed 100,000 two-wheelers each month. A large proportion of owners (around 70 per cent) were self-employed.

And then, a closer look at Andhra Pradesh and Telangana was when the big moment emerged. As much as 15 per cent of its borrowers ran a small business. “They also owned a commercial vehicle or a three-wheeler,” says Y.S. Chakravarti, SCUF’s MD & CEO. This was actually an opportunity for Shriram Transport Finance (STFC) and something the group had not noticed. “It was a sitting duck and, instantaneously, we knew synergies alone made the story very compelling.”

We address this middle-income group with our vast product range. With a larger entity, there is the advantage of access, service and we have a better view of his income.

Umesh Revankar
Vice Chairman & MD
STFC


As a lender, Shriram’s businesses come largely from the Tier II and III cities. Borrowers here often fail to make the cut with banks and look at the likes of Shriram to meet their fund requirements. The difference in interest—the rate at which money is borrowed from banks and at how much it is lent at—is where the group makes its money from. At higher rates of interest coupled with a sound understanding of the borrower profile, Shriram builds a steady relationship. Over time, the profile of this borrower has undergone a dramatic shift.

Umesh Revankar, Vice Chairman & MD, STFC, says a truck driver now wants a two-wheeler or a refrigerator or a fancy mobile phone. “Surplus money in smaller centres gets converted into gold and does not always go to the bank. We are now dealing with the aspirational Indian,” he explains. To him, the company’s core borrower is really someone like the traditional joint family but with its members operating multiple businesses. “We address this middle-income group with our vast product range. With a larger entity, there is the advantage of access, service and we have a better view of his income.”

Left to the group, the merger would have fructified much earlier.

Chakravarti points out that the IL&FS crisis and, later, what transpired at Dewan Housing Finance delayed the process. “It was a period of turmoil and we have now come off that hibernation. As a group, the focus on high asset quality has increased, and the economy is a lot more stable,” he says.

Keeping the insurance businesses out of the merger is not led by just a legal requirement but to the management, it makes sense as well. According to Chakravarti, the value proposition for insurance will be stronger than lending: “It is a highly underpenetrated business in India, and we can look at several options to unlock value.” Listing at a later date is obviously an option, and the management is not unaware of the performance of its peers such as HDFC Life, ICICI Prudential and ICICI Lombard.

Gautam Duggad, Head of Research (Institutional Equities), Motilal Oswal Financial Services, points to how the two key businesses are positioned. “Shriram Transport has a virtual monopoly in the used commercial vehicle (CV) financing segment. However, its loan growth, like other vehicle financiers, is vulnerable to cyclicality in new vehicle volumes,” he says. Likewise, Shriram City Union Finance has a presence in multiple product segments such as MSME, two-wheelers, gold and personal loans. “It has had its own share of problems in accessing liquidity whenever the external environment became tough for NBFCs,” says Duggad.

Here is really where the merger makes strategic sense. According to him, Shriram Finance (the one company that will finally exist as a result of the merger), can offer a diversified bouquet of products to its customers. “The loan growth of this entity will be less vulnerable to cyclicality in vehicle finance. Moreover, a diversified and larger loan book means credit agencies will look more favourably at it and, potentially, this could result in some savings on the cost of borrowings,” adds Duggad.

Shriram Transport has a virtual monopoly in the used commercial vehicle (CV) financing segment. However, its loan growth, like other vehicle financiers, is vulnerable to cyclicality in new vehicle volumes.

Gautam Duggad
Head of Research (Institutional Equities)
Motilal Oswal Financial Services photo


Of course, the synergy benefit outweighs anything else by a distance. Pritish Kandoi, EVP (Investment Banking), ICICI Securities, one of the advisors to the merger, says it is likely to come from a host of factors: “Among them are a cross-sell of loan and insurance products, cost of funds, and opex benefits through improved employee productivity leading to lower customer acquisition cost. All this stands on the tech framework for the combined entity that enables seamless data mining and utilising AI and ML to offer the best service to customers.”

There are around 6 million customers across STFC and SCF with minimal overlap, implying a huge opportunity to cross-sell. “As reflected by the company, seven of every 10 STFC customers have already taken other products from the Shriram ecosystem and the firm aims to get to at least two products per customer in the foreseeable future,” says Kandoi. On the anvil is a ShriramOne app, which will allow a customer to access the entire product range and also make bill payments. To Thyagarajan, the primary business is simple and that is to extend credit. “It just happened that we started off in the commercial vehicles business since access to credit there was limited. Over time, it has extended to non-transport areas such as SMEs. The customer is most important in this entire piece.”

The insurance plank

The merger keeps Shriram’s insurance businesses out of the picture. In fact, that is the piece that Thyagarajan is most enthusiastic talking about. To him, the next decade will see the existing businesses “doing reasonably well but insurance will grow very impressively.” With presence in both life and general, the insurance vertical has been a quiet performer, but Thyagarajan believes there is much scope. “We have STFC and SCUF as a ready customer base and that leads to minimum costs being incurred,” he explains. At the time of getting started with life insurance, Shriram (the joint venture partner for both life and general is South African financial services group, Sanlam), had an equity base of just `125 crore. “The regulator found that hard to believe and was initially reluctant to give us a licence,” says Thyagarajan. He is quick to explain that Shriram Life Insurance has been making a profit from the beginning.

In the general insurance space, it has worked hard on reducing the number of days to settle a claim. It started off with 70 days, which is now down to 31 days, with the target being 25 days. Through all this, the audience, as it always has been, is the underserved. Revankar is quick to point out that the insurance business, in general, is capex-intensive and the objective is to keep a close watch on the expense ratio. The total equity base, as he points out, for Shriram’s general and life together is `425 crore (`250 crore and `175 crore, respectively). “This compares very well to those who have an equity base of at least 5X more or many others who have exited,” he says. In mid-April, private equity major KKR inked a deal to acquire a 9.99 per cent stake in Shriram General Insurance for `1,800 crore, valuing the business at Rs 18,000 crore.

The approach to the business is uncomplicated, yet effective. The ability to cater to the underserved is what is critical, and that raises the question on the plans for banking, a business that the group was keen on at one point. Thyagarajan is apprehensive today about a banking strategy (a proposed merger between the Shriram group and IDFC never went through about five years ago, with differences on valuation being the reason) because he thinks customers need “supportive credit” for which access is limited. In other words, he says, it is not enough to have a relationship based only on lending, but the need to be a complete finance partner—where everyone stands to gain. “When we entered truck financing, we brought in funds at a time when they were not coming in. Risks were high and so were interest rates. We still managed an IRR of 21-22 per cent,” he says. To him, banks need to do what was done for the trucking community. “The way our businesses are structured today, I am not very keen.”

It was a sitting duck and, instantaneously, we knew synergies alone made the story very compelling.

Y. S. Chakravarti
MD & CEO
Shriram City Union Finance


Now, the scenario for the group is most interestingly poised as it embarks on a new journey. There has been some apprehension on the Shriram group after Thyagarajan. Laughing about how often he has been called an octogenarian, the man downplays the whole issue. “It does not really matter to the enterprise since a culture has been created. The direction for the road ahead is set,” is how he concisely puts it. Referring to the predictable nature of the group’s businesses, his view is that it is not “exciting enough to a lot of people”. But that is precisely what makes Thyagarajan most comfortable. “Yes, it is a humdrum existence but a very effective one, where we will continue to deliver,” he signs off with a smile.

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Story: Krishna Gopalan
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