Copyright © HT Digital Streams Limited All rights reserved. Shriram Finance: MUFG may soon be in the driver’s seat Manish Joshi 3 min read Dec 22, 2025, 6:01 am. IST Within NBFCs, Shriram is emerging as a preferred choice as there is potential to increase its stake in the future to gain management control without dealing with a majority-holding promoter. (Pixabay) Summary The deal leverages Shriram’s unique ownership structure, which allows for potential future management control, and its superior return on assets compared to traditional banks. Shriram Finance Ltd stock, already trading at a lifetime high, rose another 3.7% to ₹902 on Friday after it announced that MUFG Bank Ltd will buy 471 million shares at ₹840 per share in the company through a preferential allotment. The deal gives MUFG a 20% stake. There are good reasons for MUFG to choose Shriram Finance over other banks and non-banking finance companies (NBFCs). Private banks in India are subject to a voting rights limit of 26% for a shareholder, while there is no such limit for NBFCs. In addition, banks also suffer from the disadvantage of meeting cash reserve ratios, statutory liquidity ratios and priority sector lending requirements, which lowers their return on assets (RoA). Sure, banks have the advantage of access to low-cost deposits, mainly Casa (current account savings account), but that hasn’t enabled them to beat the RoA of most leading NBFCs. Within NBFCs, Shriram is emerging as a preferred choice as there is potential to increase its stake in the future to gain management control without dealing with a promoter holding a majority stake. Take the case of Cholamandalam Investment and Finance Co., where the Murugappa group has a 49% stake. The promoter stake in Shriram is just 25%, most of which is owned by Shriram Capital, which in turn is owned by an employee trust. Key Takeaways Shriram’s low promoter stake makes it a prime target for MUFG to potentially seek management control in the future. The agreement highlights the appeal of the NBFC model over private banks as it avoids voting limits and CRR/SLR requirements. Tier 1 capital will jump from 20% to 36%, paving the way for a potential credit rating upgrade. MUFG enters Shriram at a significant discount compared to its closest counterpart, Cholamandalam. The interest savings from debt replacement are expected to offset the 25% equity dilution. For Shriram Finance’s shareholders, the transaction is positive. The capital infusion will strengthen the balance sheet with tier 1 capital rising from 20% to 36% based on the Q2FY26 data. It could also help secure a rating upgrade of agencies from the current level of AA+, which could lead to lower borrowing costs. For MUFG, the deal was struck at an attractive valuation. If the dividend discount model, which is similar to discounted cash flow (DCF) for non-lending companies, is used for the valuation of lending companies, it leads to more complications than DCF, as there is a problem in predicting the quantum and timing of dividend payout ratio. Shriram vs Cholamandalam Even if the entire book value of a lending company is in cash, book value cannot be seen in isolation and must be seen in conjunction with return on equity (ROE). Book value multiplied by RoE gives earnings per share (EPS). So it is effectively EPS that matters, with the price-to-earnings (P/E) ratio indicating the potential return on investment. Shriram and Cholamandalam are comparable peers with market capitalization at ₹1.7 trillion and ₹1.4 trillion respectively. Shriram quotes a p/e of 13x, according to Bloomberg consensus FY28 estimates, lower than Cholamandalam’s 17x. While it is true that Shriram’s earnings CAGR is likely to be lower at 18% over FY26-28, versus 25% for Cholamandalam, the differential growth rate is captured in the valuation till FY28. While the Bloomberg consensus estimate may not have factored in the impact of the deal, the equity dilution is unlikely to have a detrimental effect on valuation. Even if fresh equity funds worth ₹40,000 crore do not achieve an average return on loans at 18% and are used to replace the borrowed funds costing around 9% per annum (based on Q2FY26), interest savings should add around ₹2,700 crore at tax rate. FY27. The incremental profit after tax will be around 24% of the current FY27 consensus estimate. So the 25% share dilution can only have a marginal impact on the EPS. Get all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download the Mint News app to get daily market updates. more topics #NBFCs #banks Read next story