The stock of housing finance company tanked 24% in the past three trading days after Bandhan Bank on January 7, 2019, announced amalgamation of Gruh Finance with the bank through a share swap ratio. It was trading at its lowest level since November 10, 2017. In comparison, the S&P BSE Sensex was up 1% during the same period.
Bandhan Bank was trading 3% lower at Rs 463, falling 16% in the past one week.
As per the proposed merger involving 100% share swap, 568 shares of Bandhan Bank will be issued for every 1000 shares of Gruh. Post the merger, HDFC Ltd, the promoter of Gruh, will hold around 15% in Bandhan Bank while Bandhan Financial Holding’s (BFHL), the promoter of Bandhan Bank, the stake would come down to 61% from the current 82.3%. The deal is subject to regulatory and shareholder approval.
The merger will be around 12% dilutive on book value and around 5% EPS dilutive. Given the premium valuation paid to Gruh Finance, in the near term, dilution will weigh on Bandhan Bank. However, long term fundamentals remain positive based on the leadership of the merged entity in niche segments, according to analysts at ICICI Securities.
Analysts believe that though the merger is short-term negative due to high dilution, it will be positive from a longer-term perspective on a core business basis.
“One can gradually accumulate from a two to three-year perspective. We maintain 'BUY' recommendation on the Bandhan Bank. Robust growth, better than banking margins and low cost to income still continue to remain strong attributes of the bank,” the brokerage firm said in company update.
“HDFC Ltd incrementally has increased the share of affordable housing both in volume and value terms. There has been an overlap in the business of both Gruh Finance and HDFC Ltd, especially in the western region. HDFC could monetize its investment in Gruh Finance at a very attractive valuation (13.3x Trailing BV),” Motilal Oswal Securities said in company update. Following this event, the brokerage firm suspended its coverage on Gruh Finance.