IndusInd Bank (IIB) has got the final approval to merge Bharat Financial Inclusion (BFIL) with itself effective 4th July 2019 and is also likely to get additional capital from the promoters.
IndusInd Bank (IIB) has got the final approval to merge Bharat Financial Inclusion (BFIL) with itself effective 4th July 2019 and is also likely to get additional capital from the promoters. Post-merger, the promoter stake will drop to 13%, which they would like to retain at 15% by infusing capital through warrants. As per media news/scheme of arrangement, the promoters will infuse Rs 27 bn through 15.7 mn warrants (25% to be paid upfront and 75% over next 18 months) at a price of Rs 1,709 a share (premium of 17% to last closing price).
We believe both these developments are positive for the stock and will be value accretive from day one. BFIL business is much more profitable than the bank along with high levels of capitalisation that will help improve both leverage and profitability. Maintain BUY. (a) CAR for the merged entity to inch up by 2%+ postmerger/ capital infusion (current CAR at 14.2%); (b) MFI business is highly profitable with 10% spread and additional capital will aid in margin expansion of 30 bps for the merged entity; (c) merger with BFIL will add granularity to IIB’s loan book and increase the share of retail loans in the bank to 48%; (d) return ratios are set to improve as capital requirements for banks are lower than NBFC-MFIs; also risk weights for microfinance are lower at 75% for banks vs. 100% for MFIs thus providing higher leverage; and (e) IIB likely to earn 1-1.5% fee income on the excess PSL generated.
Key challenges for IIB remains lack of clarity on extension of tenure of current CEO and asset quality shocks from the 1.9% loans to stressed corporate groups. However, the management recognising IL&FS exposure, providing clarity on fee income, promoter infusing fresh capital and valuations correcting provide comfort. The stock has corrected by over 25% in last one year and trades at 2.6x FY21E P/ABV on standalone book and 2.4x (post merger + infusion P/ABV) which offers reasonable upside.
IIB has set 4th July 2019 as effective date of the merger with Bharat Financial Inclusion Ltd (BFIL). MR Rao (current CEO of BFIL) will become the CEO of IndusInd Financial Inclusion Assets, whereas the liabilities of BFIL will be merged with IndusInd’s balance sheet. Consolidated financial results for the first quarter of FY20 will be published on July 12, 2019.