BQEdge | Keep An Eye On This Tata Group Company Today

BQEdge is specially curated for BQBlue subscribers. Every day this note will offer special equity market and stock-specific insights and flag select emerging trends in the tricky-to-trade derivatives market.On Today’s Edition:How traders have positioned themselves on Tata Elxsi ahead of its third-quarter earnings announcement.Why focus is back on sugar stocks.The real winner of Gruh Finance and Bandhan Bank merger..What The F&O Setup Of Tata Elxsi Is Saying.Market Editor’s Note.Sugar prices have risen by as much as 6 percent globally as dry conditions in Brazil have the market bracing for less sugar cane.Companies like Balrampur Chini have maximum sensitivity to higher sugar prices, because of the highest production of sugar. Keep in mind, Indian sugar prices don't have an immediate correlation with global sugar prices, but this will have a sentimental impact for the stocks today.Back home, the Uttar Pradesh government plans to extend the Rs 4,000 crore of soft loan to sugar mills to help them clear farmers' dues, which stands at about Rs 4,700 crore currently, as per a PTI report, which is an additional trigger for the day..Gruh Finance + Bandhan Bank = Winner?.MacquarieView: Deal is negative for Bandhan BankKey Takeaway: Minority shareholder of Bandhan Bank gets short-changedRationaleAcquisition of Gruh Finance at 13x FY20 price-to-book value is costlyCannot ignore the price paid despite Gruh’s excellent franchise and growth storyMove results in around 26 percent dilution for Bandhan’s shareholdersAcquisition appears, at least in-parts, motivated by RBI’s directiveBandhan could have very well leveraged its existing branch networkIt 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.Gruh Finance To Merge With Bandhan Bank.JPMorganView: Deal is EPS dilutive for Bandhan Bank shareholdersKey Takeaway: Expensive buy and synergies will take time to play outRationalePromoter shareholding will be partly addressed via this dealEPS-dilutive for Bandhan on a pro forma FY19E/FY20E basis by 11 percent/12 percentMerger synergies may be hard to come by in an expensive buyHDFC will likely need to sell down a stake in Bandhan BankCombined 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 ResearchView: Merger has limited direct impact on the value of HDFC (Gruh Finance promoter)Key Takeaway: Bandhan Bank has several business benefits from the dealRationaleHDFC may have to sell a partial stake of the 15 percent it will now own in the merged entityDeal mitigates the potential conflict of interest between HDFC and Gruh FinanceThe merger gives Bandhan Bank geographic expansion into the west and central IndiaBandhan 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 SuisseView: Merger may make Gruh Finance stake monetisation easier for HDFCKey Takeaway: Gruh Finance wouldn't materially impact HDFC valuationsRationaleHDFC’s increasing focus in affordable housing segment was increasing the potential of conflict of interestGruh 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 StanleyView: Current deal does not impact valuations of HDFCKey Takeaway: Complete sale of Gruh will be value accretive for HDFCRationaleDeal values Gruh Finance at 8 percent discount to Monday’s closing priceWill await more clarity on quantum HDFC has to sell in the merged entityBoth 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 OswalView: The deal is a win-win for HDFCKey Takeaway: Gruh Finance will now track the share price of Bandhan BankRationaleBandhan will have a strong presence in the affordable housing segment post the mergerA 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 FY19The 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

BQEdge | Keep An Eye On This Tata Group Company Today

Niraj Shah and Kannan Singaravelu share technical insights on which direction the shares of Tata Elxsi may move next.

Choose a plan