HDFC will be the big­gest win­ner in Band­han Bank-gruh Fi­nance merger

Mint Asia ST - - Otherviews -

News of Band­han Bank Ltd’s pur­chase of Gruh Fi­nance Ltd sent the for­mer’s shares crash­ing over 6% on Mon­day. From Band­han’s per­spec­tive, the merger swap ra­tio of 2.84:5 is slightly bet­ter than what news re­ports had sug­gested. The di­lu­tion in its eq­uity will be about 1.5% lower com­pared to a sce­nario where the swap ra­tio was set at 3:5, which isn’t much to cel­e­brate.

In­vestors are see­ing this as a des­per­ate at­tempt by the lender to re­duce its pro­mot­ers’ stake and meet the Re­serve Bank of In­dia’s (RBI’S) share­hold­ing norms. If the deal ma­te­ri­al­izes, Band­han’s pro­mot­ers will own 61% in the bank, down from 82.3% cur­rently. It still needs to do more to re­duce pro­moter hold­ing to 40%, to meet RBI’S rules.

This is par­tic­u­larly wor­ri­some be­cause com­ing to the half­way mark of the tar­get has it­self been an ex­tremely ex­pen­sive af­fair. For the deal, Gruh Fi­nance has been val­ued at an ex­or­bi­tant val­u­a­tion of 13.6 times its net worth as on Septem­ber 2018, while Band­han Bank’s price-book val­u­a­tion was pegged at less than half those lev­els at 6.45 times. This isn’t very far from the av­er­age share price of the two com­pa­nies in the past six months.

Iron­i­cally, one of the rea­sons Gruh Fi­nance en­joys such a high val­u­a­tion is on ac­count of its parent­age. Hous­ing Devel­op­ment Fi­nance Corp. Ltd (HDFC) owns 57.8% in the com­pany.

With the deal, Gruh Fi­nance will ac­tu­ally lose this ex­alted sta­tus; al­though Band­han Bank has ended up buy­ing the whole com­pany at high val­u­a­tions.

HDFC, on the other hand, gets to sell its stake at a premium. The ac­tual mon­e­ti­za­tion may hap­pen at a later stage, al­though the swap ra­tio en­sures it has got it­self a sweet deal. In fact, this gives it the best of both worlds, since it can freely pur­sue the low-in­come seg­ment with­out wor­ry­ing about over­laps with sub­sidiary, Gruh Fi­nance. HDFC said that 18% of its lend­ing in the first half of this year has been to­wards the low-in­come group and eco­nom­i­cally-weak sec­tions of so­ci­ety, where the loan value is be­tween ₹ 8 lakh and ₹ 10 lakh.

But it is not all thorns for Band­han Bank. The lender is keen to grow its non-mi­croloan book and what bet­ter way to do than grow WIN­NER TAKES IT ALL Al­though HDFC will sell Gruh Fi­nance to Band­han Bank at no ex­tra premium, the af­ford­able home loan lender’s mul­ti­ples show it is richly val­ued. low-risk hous­ing loans. The merged en­tity would have the twin cov­eted mar­kets of mi­croloans and af­ford­able hous­ing loans.

And Gruh Fi­nance has been re­port­ing a rea­son­ably strong per­for­mance. In the Septem­ber quar­ter, the lender re­ported a neat 20% in­crease in prof­its and 18% growth in dis­burse­ments. It has the low­est pro­por­tion of developer loans, cur­rently the pain point for hous­ing fi­nance com­pa­nies. The stock has steadily risen and even man­aged to largely escape the melt­down in fi­nan­cial stocks dur­ing Septem­ber.

And if the move helps Band­han Bank get some lee­way from the reg­u­la­tor, it may get some free­dom to open new branches.

That said this deal alone is not enough to meet norms. The fact that Band­han Bank pro­mot­ers need to lower their stake fur­ther, cou­pled with a pos­si­ble stake sale by HDFC, may act as an over­hang on the stock.

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