Warburg Pincus wins a heated race for Shriram Group’s housing finance biz

US-based investment giant Warburg Pincus Llc on Monday struck its biggest deal in India yet, beating some of world’s top private equity players to win Shriram Group’s housing finance subsidiary for ₹4,630 crore.

Warburg Pincus will acquire a controlling stake in Shriram Housing Finance Ltd (SHFL) from Shriram Finance Ltd (SFL) and other sellers through its affiliate Mango Crest Investment Ltd. Shriram Finance holds 85% stake in the housing finance arm, while private equity firm Valiant Partners LP, Mauritius, owns the rest.

“This transaction aims to maximize value creation for both SFL and SHFL, as both companies independently fulfill their respective long-term vision,” said Umesh Revankar, executive vice-chairman, Shriram Finance, announcing the deal late on Monday.

Mint in January first reported that the promoters of the Chennai-headquartered financial services conglomerate were in talks with Warburg Pincus and Bain Capital LP to sell Shriram Housing Finance at a valuation of about ₹5,000 crore. 

The deal, the biggest in India’s affordable housing finance space, was clinched amid rising interest in India’s rapidly growing home mortgage finance market. Shriram Finance said it will receive a minimum amount of ₹3,909 crore, plus some additional amounts based on occurrence of identified events. The transaction is expected to be completed by 7 February, 2025.

After the latest deal, Shriram Housing Finance will operate as a standalone entity, with the existing management team continuing to be led by Ravi Subramanian as its managing director and chief executive.

A consolidation amid tight regulations

India’s housing finance companies’ portfolio is expected to expand at 12-14% per annum in 2024-25 on the back of rising corporate salaries and government support for affordable housing, rating agency Icra Ltd said in a report in April.

Icra, in the same report, said the housing finance sector may need ₹1-1.1 trillion of additional funding (over the refinancing of existing maturing debt) in FY25 for this envisaged growth.

“Warburg Pincus remains excited about the affordable housing finance segment in India,” said Narendra Ostawal, head of India private equity, Warburg Pincus, in a statement announcing the deal.

Shriram Group, however, has kept Shriram Housing Finance out of its new growth plans.

Also read | Shriram founder bats for a paradigm shift in business

With assets worth more than ₹10,000 crore, Shriram Housing is a mid-sized entity that primarily lends in the affordable housing space. It competes with the likes of Bajaj Housing Finance Ltd, Indiabulls Housing Finance Ltd, LIC Housing Finance Ltd, Piramal Capital and Housing Finance Ltd, and PNB Housing Finance Ltd.

Despite the rising demand for affordable housing, however, the housing finance sector has been somewhat consolidating recently mainly on the grounds of stringent regulatory requirements.

The Reserve Bank of India has been nudging housing finance firms to get listed and meet stricter liquidity rules, akin to those for banks. The regulator also recently mentioned that India’s credit outstanding to the housing sector had increased by about ₹10 trillion over the previous two fiscal years, rising to a record ₹27.23 trillion in March this year.

While on one hand, Blackstone-backed Aadhar Housing Finance is preparing a ₹3,000-crore IPO, on the other, to comply with RBI’s rules, Piramal Enterprises Ltd on 9 May decided to merge with its unlisted subsidiary, Piramal Capital and Housing Finance Ltd.

In 2021, RBI directed all upper-layer non-banking financial companies to get listed on the stock markets within three years of classification. The following year, RBI issued a list of shadow banks, including the likes of Tata Sons, LIC Housing Finance, and Shriram Finance.

“We believe that this transaction is in the best interest of SHFL shareholders towards greater value generation and comes at an opportune time for us as well,” said Y.S. Chakravarti, managing director and CEO, Shriram Finance.

“Warburg will invest ₹1,000 cr to grow the loan book post the completion of the sale. With this sale, the group will able to use capital for its growth and focus on its core lending business. Housing finance requires long term capital,” Revankar of Shriram Finance said.

Need for cash

Before finalizing its deal with Warburg Pincus, Shriram Finance, as the promoter of Shriram Housing Finance, had been holding discussions for over five months with several potential suitors, including Bain Capital. 

According to two people familiar with the details of the final deal, the Shriram group will use the proceeds from the sale to expand its new businesses in the financial services space and strengthen its balance sheet.

“Shriram Finance Ltd will continue to focus on growth led by the short to medium-tenor consumer finance business while Shriram Housing Finance will now chart out its differentiated path,” said Chakravarti.

Shriram Group recently launched its own asset reconstruction company.

The group, which generates most of its revenues from its lending and insurance businesses, launched a super-app called ‘Shriram One’ last year to offer a one-stop solution for financial planning, investments, loans, insurance, UPI money transfers, mobile and DTH recharges, and other bill payments.

Shriram Finance said JM Financial, Barclays, and Avendus acted as financial advisors to all the sellers of Shriram Housing’s stake, while Cyril Amarchand Mangaldas advised Warburg Pincus on the transaction.

To be sure, Shriram Group will continue with its core lending business through Shriram Finance, even as the conglomerate increases focus on its new ventures in a bid to boost the group’s cash component in the books—a key reason why it has been looking to sell its housing finance arm.

Shriram Housing Finance’s loan book grew at a 44% compound annual growth rate over the last four years, with an average loan size of about ₹16 lakh.

However, Shriram Housing has largely remained confined to the southern and western states, where over 75% the housing loan business comes from buyers in the unbanked, self-employed segment.