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SFTC investors remain wary of benefits of IDFC-Shriram Group merger

An analyst call held by management last Friday could not douse the concerns on what his merger would bring for STFC shareholders.

, ET Bureau|
Updated: Jul 18, 2017, 08.01 PM IST
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The street appears to be wary of these arguments.
The street appears to be wary of these arguments.
Although the recently announced IDFC-Shriram Ram group merger is set to create a financial conglomerate, the street remains unsure about what benefits the proposed amalgamation structure will bring to Shriram Transport Finance (STFC), the vehicle finance NBFC which is sought to be kept under IDFC as a holding company. Not surprisingly, SHTF stock has lost nearly 12% since the merger announcement and nearly 6.5% after an analyst call held by two sessions prior.

Unlike speculations that SHTF and Shriram City Union, the retail focused NBFC of the Chennai based group may get merged with IDFC bank, the managements announced keeping STFC as a separate entity under IDFC as a holding structure.



An analyst call held by management last Friday could not douse the concerns on what his merger would bring for STFC shareholders even as the management said that the main rationale of the merger was that Shriram Group would become part of a larger bank franchisee increasing cross-selling opportunities while it may enjoy the benefit of lower cost of funds. STFC management indicated that Shriram group entities including STFC can also benefit from the technology platform built by IDFC group in which it has made significant investment.

The street appears to be wary of these arguments. Firstly, given that the Shriram Group caters to nearly 1 crore customers through its key NBFC businesses, this large reach itself offers great cross-selling opportunity for STFC which as of March 2017 boasted more than 14.5 lakh customers. So it appears that IDFC group is more likely to benefit on the cross-selling front than Shriram group entities, especially STFC that dominates in the pre-owned commercial vehicle financing. Moreover, the customer profile of STFC - small truck operators that are not covered by normal banking channels and who largely deal in cash - appear quite different from that of IDFC franchisee. At a time when most financial services companies are trying to tap into unbanked customer segment, it is difficult to expect that STFC would gain from the customer base that will be brought in by IDFC group. Finally, the technology argument also doesn't appear strong since a host of smaller banks and financial services companies have made good progress in improving their technological reach for optimizing their business practices. Shriram Group, including STFC can make headway on this front on its own and should not have to rely on an evolved technology platform of an organized player.

Amidst these concerns, the SFTC stock is likely to remain under pressure till clarity emerges on the swap ratio of the merger which is likely to be around 90 days since the announcement. As SFTC is going to account for a lion's share of the merged entity's ( under IDFC umbrella) loan book ( 50%) and earnings (around 45%), the shareholders would be looking for a favourable swap ratio to consider the deal.
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