With the Murugappa group buying out the 37.5% equity stake of its foreign partner, Singapore-based DBS Bank Ltd, in Cholamandalam DBS Finance Ltd (CDFL), the company would now revert to its core 30-year-old business of asset-based financing.
CDFL will now focus on three secured lending businesses, namely, vehicle finance, home loans and corporate mortgage loans such as working capital for companies.
Historically, Cholamandalam Finance, the non-banking finance company of the Rs15,000 crore Murugappa group, has had a proven track record in vehicle finance, just like its peers in the south, the Shriram group and the TVS group. “We wish to cash in on the expected boom in commercial vehicle and automobile growth, which will throw up sufficient financing opportunities,” says N. Srinivasan, director-finance of the group.
Graphic: Yogesh Kumar / Mint
The company had burnt its fingers by offering personal loans, following the entry of DBS in 2005. This business ended up with high delinquencies and hence higher debt provisioning, which hit the company’s balance sheet.
In September 2008, CDFL exited the personal loan business. In March 2009, DBS and the Murugappas pumped in Rs150 crore each through the issue of fully convertible preference shares, due for conversion into equity over 18 months.
The Murugappa group has forked out Rs376 crore to buy out the DBS stake, after which it will hold around 75% in CDFL. As part of the buyout, the Murugappas have also bought out Rs150 crore worth of the convertible preference shares held by DBS. Conversion of these shares could see equity expansion in FY11, though the exact amount of equity shares added will depend on the prevailing market price.
Often, the exit of a joint venture partner dampens investor sentiment. However, the markets have been positive on the deal. The shares have risen by about 4% to Rs94 levels since the deal was announced on Monday.
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