Analyst Corner: Bandhan Bank-Gruh Finance merger fills product, services vacuum

Updated: January 9, 2019 3:16:29 AM

The Boards of Bandhan Bank and Gruh Finance announced a merger of the two entities wherein shareholders of the latter would receive 568 shares of the former for every 1,000 shares held.

Analyst Corner: Bandhan-Gruh merger fills product, services vacuum

Yes Securities

The Boards of Bandhan Bank and Gruh Finance announced a merger of the two entities wherein shareholders of the latter would receive 568 shares of the former for every 1,000 shares held. The deal values Gruh at Rs 209 billion which is at a 7% discount to yesterday’s market capitalisation. On a concurrent basis, Bandhan is paying nearly 2x of its own valuation to acquire Gruh. Its portfolio will increase by about 50%, but more importantly the asset franchise will become stronger and more durable.

The merger has evident complementarities as it fills the product and services vacuum for customers of both companies and diversifies them geographically too. Both entities will stand to benefit from their individual niche propositions and focus on adjacent customer segments. Combined, the entity becomes a large and unique rural and semi-urban lending franchise, with scope to maintain profitability a shade below the current level of Bandhan.

While in the near term, the deal could be earnings dilutive for Bandhan, the realisation of synergies would ensure that it turns accretive thereafter. Importantly, it will bring down the promoter’s (Bandhan Financial Holding) stake to 61% from current 82%, thus possibly impressing the regulator just enough to relax the current requirement of new branch approvals and restriction on MD and CEO’s salary. However, with the addition of Gruh’s 195 branches, Bandhan will have adequate infrastructure to sustain its high growth for the next couple of years.

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HDFC will be the second largest shareholder with about 15% stake in the merged entity and is expected to pursue RBI for a dispensation to not have to reduce it to the regulatory threshold of sub-10%. In our view, most minority shareholders will not have an objection to the merger given that share swap has been proposed at fair valuation and in view of substantial complementarities that could enrich shareholder value in the longer run. Still one cannot rule out that few may want to immediately exit being wary of the near-term uncertainty.

Any significant price correction in Bandhan will be a good opportunity to accumulate the stock.

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