The Prabhadevi Branch of Bandhan Bank. (Photographer: Anirudh Saligrama/BloombergQuint)

What Brokerages Made Of Gruh Finance And Bandhan Bank Merger Deal

Shares of Bandhan Bank and Gruh Finance, a unit of HDFC Ltd., slumped today after the two entered into a merger deal as most brokerages remained sceptical on the valuation.

Here’s what analysts had to say about the deal

Macquarie

View: Deal is negative for Bandhan Bank

Key Takeaway: Minority shareholder of Bandhan Bank gets short-changed

Rationale:

  • Acquisition of Gruh Finance at 13x FY20 price-to-book value is costly
  • Cannot ignore the price paid despite Gruh’s excellent franchise and growth story
  • Move results in around 26 percent dilution for Bandhan’s shareholders
  • Acquisition appears, at least in-parts, motivated by RBI’s directive
  • Bandhan could have very well leveraged its existing branch network
  • It makes sense business-wise but this is not what one bargained for
While we do not deny Gruh’s excellent franchise and growth story, we cannot ignore the price paid. The subtext here is that this acquisition appears at least in-part motivated by RBI’s directive to bring down promoter stake from 82 percent to 40 percent. This move begs the question: Is this the right decision from a minority shareholders’ POV? We think the answer is No.
Nishant Shah, Analyst, Macquarie

JPMorgan

View: Deal is EPS dilutive for Bandhan Bank shareholders

Key Takeaway: Expensive buy and synergies will take time to play out

Rational:

  • Promoter shareholding will be partly addressed via this deal
  • EPS-dilutive for Bandhan on a pro forma FY19E/FY20E basis by 11 percent/12 percent
  • Merger synergies may be hard to come by in an expensive buy
  • HDFC will likely need to sell down a stake in Bandhan Bank
  • Combined entity should attract a higher P/B as it will be a category leader
Gruh Finance trades at a 14x FY19E P/B and hence is an expensive proposition for Bandhan Bank (FY19E P/B of 5.3x), in our view, notwithstanding Gruh’s exceptional capabilities in the rural housing business. Further, merger synergies will not likely be very material, in our view, given the limited overlap in the core competencies of Bandhan (microfinance with a focus on east India) and Gruh Finance (rural housing).
Saurabh Kumar, Analyst at JPMorgan

Citi Research

View: Merger has limited direct impact on the value of HDFC (Gruh Finance promoter)

Key Takeaway: Bandhan Bank has several business benefits from the deal

Rationale:

  • HDFC may have to sell a partial stake of the 15 percent it will now own in the merged entity
  • Deal mitigates the potential conflict of interest between HDFC and Gruh Finance
  • The merger gives Bandhan Bank geographic expansion into the west and central India
  • Bandhan Bank will have product expansion and opportunity to cross-sell
The merger gives Bandhan Bank (1) geographic expansion into the west and central India, (2) product expansion into housing finance and (3) opportunity to cross-sell business loans to Gruh (and vice-versa).
Manish B Shukla, Analyst, Citi

Credit Suisse

View: Merger may make Gruh Finance stake monetisation easier for HDFC

Key Takeaway: Gruh Finance wouldn't materially impact HDFC valuations

Rationale:

  • HDFC’s increasing focus in affordable housing segment was increasing the potential of conflict of interest
  • Gruh Finance accounts for Rs 76 per share in SOTP valuation (3.5 percent)
Gruh currently accounts for ~Rs76/share (3.5 percent) of our SOTP. The swap ratio has been fixed at 568 shares of Bandhan for every 1,000 shares of Gruh and implies a discount of 8 percent to Gruh Finance’s closing price; however, it still values Gruh at a rich 13.5x book (135 percent to loans).
Ashish Gupta, Analyst, Credit Suisse

Morgan Stanley

View: Current deal does not impact valuations of HDFC

Key Takeaway: Complete sale of Gruh will be value accretive for HDFC

Rationale:

  • Deal values Gruh Finance at 8 percent discount to Monday’s closing price
  • Will await more clarity on quantum HDFC has to sell in the merged entity
  • Both companies will benefit from geographic and product diversification
We value Gruh Finance ~3.0 percent of as per the sum of the parts analysis at current market prices. We apply a holding company discount of 20 percent. Hence, a complete sale of the stake in Bandhan Bank could be marginally accretive to our valuation. It will also increase the tier I ratio by ~370 basis points and HDFC’s F2019e core book value by ~20 percent, which it could look to leverage for lending or invest in other businesses.
Subramanian Iyer, Analyst, Morgan Stanley

Motilal Oswal

View: The deal is a win-win for HDFC

Key Takeaway: Gruh Finance will now track the share price of Bandhan Bank

Rationale:

  • Bandhan will have a strong presence in the affordable housing segment post the merger
  • A step closer to fulfil the 40 percent promoter shareholding requirement for Bandhan Bank
  • Bandhan will see BV and EPS dilution of 14 percent and 9 percent for FY19
  • The biggest advantage for Gruh is access to a stable source of funding, eastern India expansion
Post amalgamation, Bandhan will have a strong presence in the affordable housing segment. This will also help Bandhan to increase its reach in the western region. The share of unsecured loan book will decline to 57 percent versus 86 percent as of first half of FY19.
Alpesh Mehta, Analyst at Motilal Oswal