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Informist, Thursday, Jan. 1, 2026

 

By Anshul Choudhary

 

MUMBAI – Shriram Finance Ltd. could save around INR 6 billion per annum in interest payment as the investment deal with Japan's MUFG Bank is expected to help bring down the cost of funds for the non-banking finance company over the next few years, according to analysts. They expect the company's cost of funds to fall 20-30 basis points in the financial year 2026-27 (Apr-Mar).

 

Last month, Shriram Finance had announced that MUFG Bank will invest over INR 396 billion in the company for a 20% stake, which is expected to trigger credit rating upgrades for the non-bank lender. Shriram Finance got its first major credit rating upgrade Monday, when CARE lifted its rating on non-convertible debentures of INR 23.69 billion to "AAA" from "AA+".

 

Analysts expect other rating agencies to follow suit with their own upgrades, which will help to bring the cost of funds down on future borrowings by the company. While the deal with MUFG Bank has been approved by Shriram Finance board, it will take some time for the company to realise the deal's benefits as the approval of shareholders is pending. "I think it (Shriram Finance) should start seeing benefits coming in from Q2 or Q3 next year," said Vishal Narnolia, a research analyst covering the company at ICICI Direct.

 

This analysis assumes the fall in cost of funds at the median of the range given by analysts, i.e. at 25 bps. The company's current cost of funds is 8.8%, as disclosed by Umesh Revankar, executive vice-chairman of Shriram Finance, in a recent interview with CNBC-TV18.

 

Shriram Finance had borrowings of over INR 2.3 trillion at the end of the September quarter. At the rate of 8.8%, its annual interest payment comes to just over INR 206 billion. This 8.8% rate of interest should fall to 8.55% in FY27, as per analysts. Applying the lower rate of interest to the company's current borrowings, its annual interest payment should be just over INR 200 billion, a saving of about INR 6 billion.

 

Shriram Finance had reported a net profit of INR 44.63 billion for the first half of the financial year 2025-26 (Apr-Mar). Assuming the same net profit for the second half, the company's annual profit for FY26 would be over INR 89 billion, which would lead to earnings per share of INR 47.45, using the number of outstanding shares of the company at the end of the September quarter for the calculation.

 

As part of the deal, MUFG Bank will get over 471 million new shares in Shriram Finance. This is likely to result in a sharp fall in Shriram Finance's diluted earnings per share to nearly INR 38--a decline of nearly 20%. The savings in terms of interest payments will cushion the negative impact on earnings per share a little. Adding the savings of nearly INR 6 billion to the net profit, the projected annual net profit would be INR 95 billion and the diluted earnings per share would be INR 40.44--a decline of nearly 15% instead of 20% without the cost saving.

 

The Street has given a higher valuation multiple to Shriram Finance after the deal with MUFG Bank. The non-bank lender's shares have risen over 16% since the deal was announced Dec. 19. Shriram Finance's price-to-earnings multiple based on the projected FY26 diluted earnings per share and the stock's closing price Wednesday was over 26 times. This is a sharp improvement from a price-to-earnings multiple of 18 based on the stock's closing price of Dec. 18, i.e. before the deal was announced.

 

Several brokerages have issued bullish reports on Shriram Finance after the company's investor call Tuesday. At least five have raised their target prices for the stock by 5-38% and one has maintained its "buy" recommendation. The average target price of these six brokerages which have "buy" recommendations on the stock is INR 1,146--indicating a gain of over 13% from the current level. Thursday, shares of Shriram Finance closed 2.4% higher at INR 1019.70.

 

The final figure of interest payment saved could change as the company may increase its borrowings to support growth. Further, the management has indicated plans of passing on some of the savings to its borrowers.  End

 

Edited by Rajeev Pai

 

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