Warburg Pincus frontrunner to buy Shriram Housing Finance

To be sure, the sale likely hinges on the matter of valuation. Shriram pegs it at Rs 6,500 crore, inclusive of a control premium, but the offers have been in the Rs 5,300-5,500 crore range.

“We are in a silent period prior to the quarterly earnings board meeting of Shriram Finance,” a Shriram spokesperson told ET. “We cannot comment on these queries, which are speculative.”

Warburg and Bain declined to comment.

Shriram Finance, mainly involved in commercial vehicle financing, owns 84.82% of SHFL, which focuses on affordable homes. San Francisco-based PE Valiant Capital Management owns most of the remaining stake. The company revived plans to sell the company late in 2023, appointing Avendus, Barclays and as advisers. This came after protracted negotiations with private equity firms to sell a minority stake of around 15-20% for growth capital did not fructify. Subsequent negotiations with suitors like EQT (formerly Baring EQT) also failed.

ET reported February 14 that PE firms CVC, Advent, Bain and Warburg were evaluating the deal.

“It's the perfect time for Shriram Finance to sell the stake as the mortgage lender has grown significantly over the past couple of years, deriving good valuation,” an industry veteran said.

Shriram Housing offers an opportunity to benefit from the sharp growth expected in India's affordable housing space, which has gained significant momentum following the post-Covid shift in favour of home ownership, according to industry executives. The government's housing-for-all push and tax incentives have also persuaded mainstream mortgage lenders such as ad to explore this market more aggressively. In sync with the country’s economic rebound, housing finance companies (HFCs) have recorded better asset quality and profitability besides high growth in credit disbursement, making the segment attractive for investors.

Blackstone-owned affordable housing company Aadhar HFC recently refiled its draft papers with the Securities and Exchange Board of India (Sebi) to raise around Rs 5,000 crore through an initial public offer (IPO).

Both Warburg and Bain are big investors in financial services with bets across banks, shadow lenders and fintech companies. Warburg also holds a minority stake in , a public company, but has been reducing its exposure of late via open market trades.

With rapid urbanisation and migration of labour from rural to urban, demand for affordable dwelling units is expected to swell. The demand is especially higher in tier 2 and 3 cities. Shriram targets affordable housing loans in semi urban and urban segments of the south, west and north, which the banks typically ignore.

The tangible net worth (TNW) of the company stood at Rs 1,298 crore at the end of FY23 and is expected to rise to Rs 2,000 crore at the end of FY24. The management has said previously that SHFL expected assets under management at Rs 14,000 crore by the end of FY24 and Rs 20,000 crore by the end of FY25, mainly through the organic route, apart from strategic acquisitions. The draw for PE funds is primarily on account of a scaled platform that can be grown further via bolt-on acquisitions.

At the end of FY23, housing finance accounted for 64% of SHFL’s portfolio and non-housing the rest, as per Care Ratings’ calculations in October. However, Crisil said in a report in July last year that SHFL has been changing its long-term strategy with a plan to grow and diversify its loan portfolio substantially over the coming years with a new core management team.

“Under the revamped model, while housing finance will remain a key focus area, SHFL has also been offering products such as loans against property and relatively a small portion towards construction finance for diversifying its portfolio,” it had said.

The company continues to focus on the self-employed sector with 75% of its portfolio having a credit bureau score of more than 700. The company also focuses on the existing customer base of its parent Shriram Finance Ltd. The company has been keen to concentrate its focus on select geographies and has decided to contain its operations to seven to eight states, down from 15, Crisil had said.