Investors have reaped a windfall from the Srei Infrastructure Finance stock, which has shot up after the announcement of its joint venture with BNP Paribas. BNP Paribas’ leasing arm is paying Rs775 crore for a 50% stake in a joint venture to which Srei’s main business, that of equipment finance and leasing, will be transferred, along with its insurance broking operations. The deal therefore values the joint venture at Rs1,550 crore. At Rs60.50 per share—the value of the Srei Infrastructure stock on 30 May—the market capitalization of the company was around Rs660 crore. So it’s obvious the stock had to move up substantially, even after assuming that BNP Paribas paid a hefty premium as a strategic investor.
Moreover, Srei also has other businesses such as project advisory and private equity, and it has a stake in the equipment rental business, Quipo, all of which add to the stock’s total value. Consider also the fact that Srei Infrastructure would have needed to raise capital to fund its growth plans, and it’s no wonder the stock has surged. According to analysts, it still has some way to go.
Why has BNP Paribas paid such a premium? Starting the business from scratch would have been far more expensive for BNP Paribas and its chances of success much less. Srei has a strong franchise in the equipment finance market for the small and medium enterprise sector. It has a 30% share in the construction equipment market.
Despite the more risky profile of SME borrowers, Srei has been able to keep its non-performing assets near zero. Srei is a play on the rapid growth of infrastructure in the country and its asset book has been growing at a compounded annual growth rate of around 35%. And lastly, the deal is a very good fit, because BNPParibas Lease Group has been in this business for 50 years and is the European leader in the field.
The BNP Paribas connection boosted the Sundaram Finance stock, after it announced the sale of a 49% stake in its home finance subsidiary to the French bank in early May. Good March quarter results have led to another jump. Net interest income rose 20% to Rs266 crore and net profit grew 22% to Rs100.5 crore after exceptionals. Sundaram gets 93% of its business from auto financing, with 60% from commercial vehicles.
The company took two rate increases last year (in July and November) to adjust its yields to rising interest costs, and its full effect was seen in the second half of the year. Net interest income growth in the second half stood at 39%, against 0.7% in the first six months. Also, given its reliance on commercial vehicles, a large chunk of its business happens in the second half period. Even its securitization business picks up in the second half.
But the interest rate increases played no small role. In the March quarter, for instance, net interest income grew by 24.6% over the December quarter, higher than the 17.4% growth in gross income.
Yet, while the company’s measures to tackle rising interest costs have begun to pay, the concern now is that volume growth would slow down dramatically. Commercial vehicle sales fell in April and May due to higher finance costs. If the trend continues, companies such as Sundaram will take a hit. Already, the company expects that growth in disbursements will fall to 12-15% this financial year, from 28% last year.
Its subsidiary companies in the home finance, insurance and mutual fund space have also been doing well. Their combined profit in Sundaram’s consolidated results have risen by over 50% to Rs40 crore.
But future performance will depend on how its core auto financing business fares this year.
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