IndusInd-BFIL merger a win-win deal

While deal valuations aren't known yet, both set to gain significantly

After months of speculation, IndusInd Bank and Bharat Financial Inclusion (BFIL) ended the guessing game on Monday. The parties have entered into an exclusivity agreement for a potential amalgamation or any other suitable structure. While pricing or valuation-related details aren’t known, Romesh Sobti, MD & CEO, IndusInd Bank, states the transaction would be a share-swap deal. Therefore, analysts at Edelweiss, assuming BFIL’s share price at Rs 930 (Friday’s closing price), estimate that the swap ratio may be 1:1.7 — that is, one share of IndusInd Bank for 1.7 shares of BFIL, resulting in 12.7 per cent equity dilution for IndusInd Bank. However, irrespective of these numbers, the merger is seen as a win-win for both parties.
 
For BFIL, lack of a strong banking-channel support resulted in disbursals and collections taking a hit after demonetisation, the impact of which was seen in the March 2017 and June 2017 quarters, as the financier undertook a massive clean-up of the loan book. Past experience also indicates the vulnerability of the microfinance institution (MFI) players. Small finance banks such as Ujjivan and Equitas, too, have witnessed dismal asset quality in the past two quarters, though, their disbursals have been better due to their broad-based product offerings. Sobti, in an interaction with a television channel, said after the merger, as BFIL would operate as a bank, its cost of funds could reduce by about 100 basis points (bps). Even now, BFIL’s cost of funds at 8.9 per cent is considered to be the most competitive among MFIs. Further reduction in costs could put the combined entity in a sweeter spot.
 

 
For IndusInd Bank, the deal would be value-accretive from Day One. Considering BFIL’s loan book as of June 30, at Rs 9,631 crore, the deal increases the MFI loan book exposure from three per cent for the bank, as of June 30, to 10 per cent. This could result in higher fee income by way of selling PSLCs (priority sector lending certificates) for IndusInd Bank. Overall, analysts at Edelweiss say, the merger could help IndusInd Bank marginally cross the two per cent return on assets mark. While the brokerage says a jump in this ratio may not entail an increase in trading (stock valuation) multiples, most analysts feel otherwise. “Better return profile and an opportunity to broad-base the liability franchise would bump up IndusInd’s valuation in the next 8–12 months,” says an analyst with a foreign brokerage.
 
However, to judge who benefits more, details on pricing are critical. As BFIL’s asset quality has recently been under stress, analysts believe BFIL may not have an upper hand in negotiating the valuations. Whether all the asset quality-related pain is fully absorbed isn’t known yet, they add. “But, it is equally important to remember that BFIL is still the best MFI franchise to shop for and this should help BFIL bargain some premium,” said another analyst.
 
The coming weeks, though, will indicate who walks away with the bigger piece of the cake.