Shriram Finance-MUFG Deal EXCLUSIVE: ‘Targeting 20% growth, pre-deal ROE recovery in 5 years’ – Executive VC Umesh Revankar

Shriram Finance has sealed India’s largest financial services deal with Japan’s MUFG ( Mitsubishi UFJ Financial Group), raising $4.4 billion in fresh capital. In an exclusive conversation with ET NOW’s Hersh Sayta, Shriram Finance's Executive Vice Chairman Umesh Revankar detailed a roadmap that includes a 20 per cent growth target for Assets Under Management (AUM) and a significant improvement in return metrics over the next five years.

Revankar also explained how the strategic capital infusion deal with MUFG will reshape the NBFC's (Non-Banking Financial Company) balance sheet, profitability, and long-term growth trajectory.

The deal, which was nearly a year in the making, is expected to conclude within the current financial year, pending approvals from the RBI and CCI.

Shriram Finance-MUFG Deal: Excerpts from the interview:

Question - How long has this been going on for?

Revankar: We have been discussing this with multiple people. It's not just with MUFG, but with MUFG, I should say, we have been discussing various aspects of the business and proposals for nearly a year. And I'm happy that it got concluded within this financial year.

Q: It will dilute your ROE to a certain extent. Of course, it will bring in efficiencies, and we will talk about that. But talk to us about the ROE trajectory. How much does it come off by? And where does it go, and how quickly can it recover?

Revankar: Basically, what happens is when the new capital comes in, debt-to-equity ratio comes down from around 4.3 to 2.6 because ROE is a component of ROA and leveraging. So, as the ROA improves, because the net interest margin will improve, because our borrowing cost comes down, and also we believe credit costs will also come down to some extent. So, as the ROA increases and the leveraging increases, the ROE will go up. We believe that it may come down to around the 13.5 level in the next year. Then probably it should go up every year, and we should go back to the present level in five years' time.

Q: So, 3.1%, 3.1% is likely going to be normalized ROA if I remove the liquidity buffers that you currently have? So, given this transaction, how much does the ROA go up by? And I'm not talking about ROE because ROE will compress, but ROA, how much will that go up by just as a result of the margins going up on a standalone basis, on the current steady-state basis?

Revankar: I believe the ROE will go up to the 3.4 to 3.5 level from the 2.8 level. So, that's the kind of improvement we can see in ROE.

Q: The credit rating upgrade, right? A basic credit rating upgrade will likely add to your margins by maybe 50 to 70 basis points, which should translate to maybe 35 to 40 basis points of profit after tax or ROA accretion, which will come to you. And therefore, firstly, confirm that for us, how quickly does that happen?

Revankar: Basically, what we are looking at is, because of the strong balance sheet, our borrowing costs will come down because of our ability to manage the borrowings much better. And the credit rating upgrade is something which will follow. It will not happen immediately unless the rating agency immediately looks into it. So, once the money comes in, then they will look at what happens to the overall performance, and then they will confirm it. So, there are two things. A stronger balance sheet will help us immediately, and the credit rating will further help us. So overall, we believe over the period we should get around a 100 basis point advantage.

Q: 100 basis points over what period? So, that will also depend on how quickly your borrowing, your current borrowing, your liabilities, mature. So, give us a pulse of that. How quickly does your liability mature because that is what will translate to your ROA and that will probably...I'm trying to understand how quickly your ROA gets to 3.5%?

Revankar: If you look at our typical borrowing, it's 3 years. And the average is one and a half years. So 18 months, you can expect it to reach the best.

Q: And how quickly does the transaction close for you from now?

Revankar: It is subject to RBI and CCI approval and we expect to have it in this financial year, hopefully and that is the best possible timeline we have.

Q: Therefore maybe 18 months from that point you will start to see nearly the entire, or at least half of your borrowing repriced within 18 months. Is that the right way to think of it?

Q: Rs 40,000 crore is a large quantum of money. How quickly do you deploy that because that will sit on your balance sheet for a long period further dragging some of your metrics. So I'm trying to get to the fact, how quickly do you deploy it?

Revankar: If you ask me how long this cash will remain? The cash will be deployed in a quarter's time because we lend around Rs 45,000 to Rs 50,000 crore in a quarter. But yes, it will increase our capital. So capital utilization will take time. Maybe four to five years. But the lending or the cash utilization will happen in a quarter. Let's not take a long time.

Q: And are you already in conversation with some of the credit rating agencies? I'm sure there are already questions coming your way. Are you already in conversation, or is it going to take some more time?

Revankar: So, we have been talking to them post-merger. What happened is that prior to the merger, Shriram Transport Finance was considered a mono-line business. And not having multiple asset classes was one of the reasons for not getting an upgrade, and also, the presence across the country was something that for Shriram City Union Finance, the reason was that they were more South-focused. Once both combined, we felt that the credit rating upgrade should happen automatically. But it's already taken more than two years. Hopefully, with this capital infusion, especially after a strong balance sheet, it will happen faster.

Q: How seriously are you looking at other lines of business outside of vehicles?

Revankar: We are not really looking into other lines of business. But because what happens is we have been focusing on asset financing. And vehicle financing is one asset which earns by itself. Vehicles, tractors, machinery, two-wheelers, they are really helping us with a very strong balance sheet and a very strong credit profile of the customer. I think we will continue with that.

Q: There’s been talk or there's been conversation or expectation from the market that you are getting into green financing. And so how large will that portfolio be if at all that were to come to fruition, or will it just be marginal?

Revankar: Right now, it's marginal because it all depends on how EVs will progress in India. We are quite comfortable with the kind of progress we have made in EV financing. We are doing around Rs 100 crore per month. And possibly it can double in the next year because more and more people are moving towards electric vehicles, especially in the passenger segment. So, I feel the transformation will happen in the passenger segment, and maybe the government is trying to bring in a policy which is conducive to EVs will. Also have a major impact on public transportation. The majority of public transportation buses and cars will move towards EVs, and therefore I feel that the speed of green financing will increase. Maybe next year it will double. After that, it may have much faster growth. So, we had guided in the beginning when we announced the EV program that in three to four years we would like to reach Rs 5000 crore a year. We are on track. In the first year, we wanted to be very careful. We wanted to be very steady and then accelerate.

Q: Whether you will actually grow above the 15 to 70% threshold at which you have traditionally grown. Because of so much capital and so much equity capital, it gives you the bandwidth to do that. Would you grow at 20%?

Revankar: Definitely, yes, we are targeting a 20% growth on overall AUM. Definitely, we feel that there is a lot of opportunity, especially in the commercial vehicle and passenger vehicle segments. After this steep increase in prices because of the Bharat Stage VI implementation, many people have postponed buying or upgrading their vehicles. Especially in the commercial vehicle segment, I feel all this upgrading will happen, and people will start buying, and that will really help us to grow faster. And I feel it's not just new vehicle purchasing; even upgrading from existing older vehicles to new vehicles also gives us that kind of scope and opportunity.

Q: What gives you the confidence that this will sustain? Because the kind of capital you've raised is not for a one-year period; it seems like it's a six-seven-year cycle that you're playing. What gives you the confidence that a 20% growth rate for the next five, six, seven years can be sustained?

Revankar: It all depends on the economy. If the country's economy is growing, if you see at the last two quarters, India has been growing at over 8%. And if this is sustained, because the government is focused, the government is making it possible for India to grow. They are building infrastructure; there is enough push given by the government for various sectors to grow. With this kind of environment, I feel, and even the regulator or the RBI, they are also looking at pushing the growth by reducing the repo rate. That will definitely have a positive impact. So, the growth should come from both consumer spending, government infrastructure spending, and also the logistics costs coming down, and India becoming more of an export hub, or many of the industries being built in India for export purposes.

Q: So, a 20% growth rate in the next five years is something that you would aim for?

Revankar: Yes, definitely.

Shriram Finance Announced A $4.4 Billion Capital Deal, The Largest In Indian Financial Services [WATCH FULL VIDEO]