Could MUFG’s stake trigger a re-rating for Sriram Finance? Here’s what the experts say

Japan’s MUFG Bank for 20% equity stake in Shriram Finance for Rs. has made a decisive statement on India’s credit sector with its plan to invest Rs 39,620 crore, which is poised to become the largest foreign direct investment in India’s financial services space. For investors, the scale, structure and timing of the transaction read as a powerful endorsement of Sriram 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 equity allotment that will give it a 20% stake in Sriram Finance. The company described the transaction as a landmark development, saying it underlines the company’s position as India’s second largest retail NBFC and strengthens confidence in the country’s credit and financial services sector. The company said the capital infusion will strengthen its balance sheet and accelerate its growth plans.

Market experts see the deal as a clear sign of confidence at a time when there is an influx of foreign portfolio investors into India, especially in the secondary markets. Gurmeet Chadha of Complete Circle Consultants said the MUFG investment could be a trigger for a rating upgrade for Sriram Finance. He pointed out that the company’s cost of funds is currently around 8.7-8.8% and reflects improved operational performance in recent quarters, aided by efficient liquidity management.

While the capital inflow is clearly growth capital rather than liquidity, Shriram Finance already operates with strong capital ratios, Chadha said. According to him, the transaction has come at the right time and represents a strong vote of confidence in both the company and the wider financial sector. He also highlighted the pickup in several of Sriram Finance’s core portfolios, including gold loans, commercial vehicles, passenger vehicles and MSME lending, adding that NBFCs remain among the better-performing players in the sector.

Brokerages have echoed this optimism, with many highlighting the potential for strengthening balance sheets, lower funding costs and improved growth visibility. PL Capital reiterated its buy call on Sriram Finance and raised its target price per share to Rs. 1,060 done. The brokerage said the transaction will significantly strengthen the company’s capital base and improve balance sheet resilience, providing long-term growth capital to support expansion in the credit segment.

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

MK also described the investment as a strategic move by MUFG with a long-term perspective. The brokerage said the capital infusion will significantly increase Shriram Finance’s net worth, taking its Tier I capital to a level comparable to that of strong NBFCs and most non-PSU peers. On a pro forma basis, MK estimates that Sriram Finance’s Tier I capital ratio could rise by around 14 percentage points to the mid-30% range.

According to MK, the tie-up with MUFG could help narrow the gap in funding costs between Sriram Finance and AAA-rated peers by around 100 basis points. A strong balance sheet and low borrowing costs could allow the company to expand into new products and customer segments, boosting growth in the medium term. While the brokerage expects returns on equity to moderate in the near term due to over-capitalization, it believes the long-term benefits outweigh this impact.

MK also highlighted several options arising from the deal, including the ability to attract top talent and the possibility of transitioning the bank in the future. It reiterated its buy rating and raised its target price to Rs. 1,050, noting that he did not fully consider these options in his estimate.

For investors, the message from analysts is clear. MUFG’s entry strengthens Sriram Finance’s capital base, improves balance sheet resilience and increases the likelihood of periodic rating upgrades and lower funding costs.

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

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