Shriram Finance Rallies, Chola Finance Slides Post MUFG Deal: Here's What's Driving The Divergence

Shares of Shriram Finance Ltd. gained after Japan’s MUFG agreed to invest Rs 39,618 crore for around a 20% stake in the company, a deal that significantly strengthens the lender’s balance sheet and sharpens its valuation appeal.

Under the transaction, MUFG will subscribe to 47.1 crore shares at Rs 840.93 per share, representing about a 7% discount to the prevailing market price. Following the issuance, Shriram Finance’s promoter stake will decline to 20.3% from 25.4%, while public shareholding will dilute to 59.7% from 74.6%.

However, shares of Cholamandalam Investment and Finance Company Ltd. took a hit, sliding nearly 4% post the announcement. Read on to know why.

On a 12-month forward basis, Shriram Finance is valued at about 2.3 times price-to-book, compared with 4 times for Chola Finance and around 2 times for M&M Finance. Applying the forward multiple to the new book value implies a per-share value of around Rs 978.4 for Shriram Finance, underpinning optimism around the stock.

In contrast, Chola Finance shares came under pressure as investors reassessed relative valuations. With the stock trading at about 4 times book value, Chola appears significantly more expensive than Shriram Finance, especially in the wake of MUFG’s large strategic investment and the sharp uplift in Shriram’s book value.

A key positive for investors is the impact on book value. Post fund infusion, Shriram Finance’s book value is set to rise to Rs 425.2 per share from Rs 321, marking a 32% increase. At the issue price of around Rs 841, the stock trades at roughly 2.1 times book value.

Simply put, Shriram Finance is gaining on the back of cheaper valuations and a stronger balance sheet, while Chola Finance is seeing selling pressure due to its richer valuation multiples.

Shares of Shriram Finance are currently trading 4.52% higher at Rs 908.75 higher, while Chola Finance shares are down 3.38% to Rs 1,622.30, as compared to a 0.62% rise in the Nifty 50 index.