IndusInd warms up to Bharat Fin, but flinches at price

All-share deal may value Bharat Financial at Rs 12,000 crore

In what would be the largest deal in the microfinance space, Hinduja-promoted IndusInd Bank is in talks to take over Bharat Financial Inclusion in an all-stock transaction valuing the latter at approximately Rs 12,000 crore.
 
A source close to the transaction said the swap ratio for the merger is currently under negotiation and an announcement is expected soon. The recent run-up in the Bharat Financial’s share price from Rs 500-levels in December last year to the current market price of Rs 851 a share has increased the valuation of the microfinance company by 70 per cent – much to the discomfort of IndusInd Bank. “The current market price is not something that IndusInd would like to pay and it would certainly negotiate hard,” said a source.

 
Another source said Bharat Financial was negotiating for a valuation of 3.3 times its 2017-18 book value, which works to Rs 13,000 crore.
 

On Wednesday, IndusInd shares closed flat at Rs 1,327 a share with a market value of Rs 79,400 crore while Bharat Financial shares closed at Rs 851 a share, up 4.5 per cent with a market value of Rs 11,700 crore.
 
When contacted, IndusInd Bank said the bank will not comment on speculation.  Bharat Financial said in a statement: “The company has been exploring various options from time to time and will make an announcement in accordance with the relevant regulations as and when a transaction, if any, is approved by the board.”

 
If the transaction goes ahead, then IndusInd would join the list of other banks which acquired microfinance companies to tap the lower income segment of the market. In July last year, IDFC Bank acquired Grama Vidyal Microfinance while Kotak Mahindra Bank took over BSS Microfinance in September last year for Rs 139 crore. The microfinance industry is also undergoing a churn with Bandhan Bank becoming a full-fledged bank after starting its operations as a microfinance company and seven companies becoming small finance banks.
 
Analysts said the acquisition of microfinance companies would help banks to grow at a fast pace and tap the lower end of the customer base and meet priority sector lending targets as microfinance loans qualifies for priority sector lending targets.

 
Having lost out on the small bank race in 2015, analysts said there are concerns over Bharat Financial’s asset quality. While the micro-loan lender has maintained an enviable gross non-performing asset level of less than 0.1 per cent, they expect it to rise from the March quarter. In a recent call with analysts, Bharat Financial mentioned that around 4.5 per cent of its loan book looked weak after demonetisation. There are also issues with respect to collection as no loan instalment have been received in 1,200 collection centres, mostly in Maharashtra and Uttar Pradesh.
 
A merger with IndusInd Bank would address some of Bharat Financial’s concerns, and it would be able to scale the business and handle asset quality pressures better.

 
For IndusInd, the merger would fortify its priority sector lending book. The bank plans to increase its exposure to microfinance institutions to Rs 10,000 crore in the next three years. The MFI sector exposure stood at Rs 3,000 crore as on December 31, 2016. The merger provides an immediate bump-up to this objective.
 
The merger will also boost IndusInd's total income and profit by about 10 per cent and 20 per cent, respectively, from day one. Moreover, Bharat Financial's return on assets at 4 per cent makes it better placed than IndusInd’s 1.88 per cent for the 12 months ended December 2016. Since Bharat Financial's business is more profitable, though relatively riskier too, the combined entity's profitability should get a leg-up.

 
Bharat Financial also increased FY17 asset under management (AUM) guidance from Rs 8,500 crore to Rs 9,000 crore and reiterated an ambitious 50 per cent AUM growth for next fiscal.