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Initially a transport finance company, Shriram Finance now counts itself among the largest retail NBFCs in India. Part of the Shriram Group, it boasts an impressive pan-India network of over 3,000 branches and AUM (assets under management) of nearly Rs 2 lakh crore as of December 2023.
The company has recently come under the limelight as NSE (National Stock Exchange) announced that Shriram Finance will be included in the Nifty50 index from March 28, 2024, replacing UPL. For the uninitiated, the Nifty50 represents the weighted average of the 50 largest Indian companies listed on the NSE.
Let's explore Shriram Finance's journey from its inception 45 years ago to its inclusion in the Nifty 50 index today.
A background
Shriram Finance was established in 1979 as Shriram Transport Finance Company by R Thyagarajan. It aimed at providing commercial vehicle financing services to the lower-income strata, particularly those with minimal to no credit history and small truck owners (those owning up to 2-3 trucks). Gradually, it carved out a niche for itself in this segment.
The company got a significant boost in 1990 when Tata Motors and Ashok Leyland made strategic equity investments, helping it expand its presence nationwide. More than a decade and a half later, in 2006, the company reported a profit after tax (PAT) of over Rs 100 crore for the first time since its inception.
The right steps at the right time
Shriram Transport Finance Company introduced its subsidiary, Shriram Automall, India's first auction platform for pre-owned commercial vehicles to create an ecosystem. This, coupled with focusing on a niche market and scaling up its pan-India presence, helped the company dominate the pre-owned vehicle financing segment for several years.
The company got a boost in 2018 when Cartrade (an online marketplace for used cars) acquired a 51 per cent stake, transforming it into a phygital (physical+digital) platform. Eventually, Shriram Transport Finance Company became a market leader in the pre-owned vehicle segment, with over 135 automalls across India. Although not a significant revenue contributor (less than 2 per cent), this segment helped generate leads for its vehicle financing business.
Exponential growth
Between FY04-14, the company's AUM increased by 41 per cent annually. In 2014, Ajay Piramal, chairman of Piramal Enterprises, acquired a 10 and 20 per cent stake in Shriram Transport Finance and Shriram Capital, respectively, intending to expand Piramal's presence in the financial services space. Piramal became the chairman of Shriram Capital in the same year.
Under his leadership, Shriram Capital consolidated its presence in the financial services business, especially its general insurance segment across various geographies. Moreover, Piramal helped integrate the operations of all Shriram group companies, ensuring all lending and insurance services could be provided under one roof.
However, like many companies, Shriram Finance, too, faced its fair share of challenges. Let's look at some of them.
The setbacks
Although Ajay Piramal aimed to merge Piramal Enterprises with Shriram Capital eventually, the deal did not materialise due to the sheer size difference between the two entities.
Piramal then focused on merging Shriram Capital with IDFC Bank in 2017. However, this deal, too, was called off due to differences in the share swap ratio. Later, in 2019, Piramal stepped down as the company's chairman owing to cultural differences. And in June 2023, he divested his entire stake and exited the business.
Moreover, between FY17 and FY19, the company faced multiple crises, such as demonetisation, stricter RBI regulations on recognitions of NPAs (non-performing assets), reducing the overdue period from 120 to 90 days in 2018 and a severe automobile industry slowdown in 2019.
The situation worsened with the IL&FS crisis in 2019, which increased banks' aversion to NBFC lending. Also, the gross NPA ratio of the company shot up to 8.4 per cent in FY19 from 3.8 per cent in FY15!
Despite these headwinds, Shriram Finance continued to grow its AUM, albeit at a slower pace of 10 per cent annually between FY17-FY21.
On the path to recovery
Recognising the risks associated with focusing solely on a single segment, vehicle financing, Shriram Transport Finance merged with Shriram City Union Finance and its promoter, Shriram Capital. The merger was finalised in December 2022 and aimed at diversifying the loan book across various segments, such as commercial and personal vehicle financing, gold loans, personal, MSME and housing financing. The combined entity that was formed is known as Shriram Finance today.
Through the combined entity post-merger, the company's management expects the AUM to increase by 15 per cent annually for the next three years by leveraging cross-selling of its products to its already established customer base with the help of its pan-India branch network.
What does the company's future look like?
Shriram Finance has taken several steps to improve its financials.
First, its long-term strategy is to improve asset quality by diversifying its loan portfolio while maintaining a strong emphasis on its core strength, i.e., the vehicle finance segment.
Second, Shriram Finance aims to streamline its operations, providing all financial services and credit facilities under one roof.
However, the company has faced exorbitantly high NPAs in the past, especially during periods of economic slowdowns. This has been largely attributed to its core customers being in the lower-income bracket and may continue to pose a challenge in the future.
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