Could MUFG’s efforts lead to a revaluation of Shriram Finance? This is what experts say

Japan’s MUFG Bank has made a defining statement on the Indian credit sector with its plan to invest Rs 39,620 crore in Shriram Finance for a 20% equity stake, in what is expected to be the largest foreign direct investment in Indian financial services. For investors, the size, structure and timing of the transaction read as a strong endorsement of Shriram Finance’s fundamentals and its long-term growth trajectory.MUFG, the country’s largest lender with $2.8 trillion in assets, will invest through a preferential allotment of shares, giving it a 20% stake in Shriram Finance on a fully diluted basis. The company described the transaction as a milestone, stressing that it underlines the company’s position as India’s second largest privately held NBFC and strengthens confidence in the country’s lending and financial services sector. The company said the capital injection would strengthen its balance sheet and accelerate its growth plans.

Market experts see the deal as a clear signal of confidence at a time when India has been witnessing an outflow of foreign investors, especially in the secondary markets. Gurmeet Chadha of Complete Circle Consultants said the MUFG investment could be a trigger for a rating upgrade for Shriram Finance. He pointed out that the company’s borrowing costs are currently around 8.7-8.8% and that recent quarters have already reflected improved operating performance, aided by efficient liquidity management.Chadha said the capital being injected is clearly growth capital rather than liquidity support, noting that Shriram Finance already operates with strong capital ratios. He said the transaction comes at an opportune time and represents a strong vote of confidence in both the company and the wider financial sector. He also highlighted the revival in several of Shriram Finance’s key portfolios including gold loans, commercial vehicles, passenger cars and MSME loans, adding that the NBFC continues to be one of the better managed players in the sector.

Brokers have echoed this optimism, with several highlighting the potential for balance sheet strengthening, lower funding costs and better visibility into growth. PL Capital reiterated its buy call on Shriram Finance and raised its price target to Rs 1,060 per share. The broker said the transaction would significantly strengthen the company’s capital base and improve balance sheet resilience, providing long-term growth capital to support expansion in the credit segments.

PL Capital expects CRAR to see a 15% increase with the equity infusion, adding that the deal puts Shriram Finance firmly on track for a rating upgrade. While return on equity is likely to remain subdued at around 12% in FY28 due to higher capital levels, the brokerage believes return on assets will remain stable at around 3.1%. It maintained its valuation ratio and said the deal strengthens confidence in the company’s medium-term prospects.

Emkay also described the investment as a strategic move by MUFG with a long-term perspective. The broker said the capital infusion would significantly increase Shriram Finance’s net assets, taking its Tier I capital to a level comparable to that of the strongest NBFCs and well above that of most non-PSU peers. On a pro forma basis, Emkay estimates that Shriram Finance’s Tier I capital ratio could increase by about 14 percentage points to the mid-30% range. According to Emkay, the partnership with MUFG could help narrow the nearly 100 basis point difference in the cost of funds between Shriram Finance and AAA-rated peers. A stronger balance sheet and lower financing costs could allow the company to expand into new products and customer segments, accelerating growth in the medium term. While the brokerage expects short-term equity returns to moderate due to overcapitalization, they believe the longer-term benefits will far outweigh this impact.

Emkay also highlighted several options arising from the deal, including the ability to attract top talent and the possibility of a future transition to a bank. It reiterated its buy rating and raised its target price to Rs 1,050, noting that it has not fully factored these optional features into its estimates.

For investors, the message from analysts is clear. MUFG’s entry strengthens Shriram Finance’s capital base, improves balance sheet resilience and increases the likelihood of a rating upgrade and lower financing costs over time.

Shares of Shriram Finance are up 55% since the start of 2025.

(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. They do not represent the views of the Economic Times)