Analysts Dub Swap For Itc-Bhadra Merger & #39;Fair & #39;

Analysts with top brokerage firms have termed the swap ratio for the merger between ITC and ITC Bhadrachalam as fair, though both scrips fell 5.9 per cent and 9.6 per cent, respectively, on the Bombay Stock Exchange (BSE) today.

Sanjay Bhatia, manager of Ambit Corporate Finance, said the fall in the two scrips was mainly in line with the overall sentiment and was not necessarily driven by a poor response to the swap ratio. The BSE Sensex tumbled 5.85 per cent to a new eight-year low of 2,600.12.

"However, the real result from the merger move is yet to be ascertained. ITC's decision to merge the paper board business was based on its move to reduce cost of operation," Bhatia added.

 

An analyst with a broking firm said the market has already discounted the merger move over the past few weeks. "There will be no further decline in the price of ITC scrip. The swap ratio of 1:16 is in line with the market price of the two firms," he said.

However, some analysts expressed concern as the merger move may force ITC to infuse huge funds into the paper board business over a period of time. Besides, the paperboard business is highly capital intensive and less profitable compared with the tobacco business.

Over the past few weeks, domestic markets reacted sharply because of fears that ITC's bottomline will be affected by the merger. The move is unlikely to find favour with investors, who fear that ITC's results will be dragged down by the acquisition of the paper unit.

"ITC Bhadrachalam has lower operating margins and return on capital employed than ITC, and this will affect ITC," said an analyst.

However, on Friday the ITC scrip outperformed the market as investors found the swap ratio fine. "The merger is only a rationalisation of businesses since ITC is already owning 60 per cent stake in the paper board business," analysts said.

After opening at Rs 635 on the BSE, the ITC scrip on Friday closed at Rs 602.85 against the Thursday's close of Rs 642.40. The share has touched an intra-day high and low of Rs 640.95 and Rs 596.35, respectively, while the volume traded was 7.49 lakh.

The ITC Bhadrachalam share, which opened at Rs 41, closed at Rs 37.15 on the BSE against Thursday's close of Rs 41.10. 12,716 shares changed hands in a day marked with high volatility in all major scrips, said marketmen.