Gruh Finance merger: HDFC's stake in Bandhan Bank would value a whopping Rs 13k cr - What home buyers should know

The next big merger is of Bandhan Bank’s with Gruh Finance! Interestingly, when the merger was announced investors had already shown their sentiments in the stock price of Gruh and Bandhan which was a clear indication of unhappiness. But this was not the case for Housing Development Finance Corp (HDFC), as the company is seen to be the real winner of this coalition. HDFC currently holds 58% stake in Gruh and the company has been growing well especially in regards to affordable housing finance. With this, the next big gainer can be attributed to homebuyers of this merger. Let’s find out how!

The deal! 

Talks of a merger between Bandhan Bank and Gruh Finance has been for quite some time now, but it was on January 07 when an official announcement was made. 

The board of directors approved a scheme of amalgamation between Gruh Finance (Transferor Company) and Bandhan Bank (Transferee Company) along with their respective shareholders and creditors. 

The deal involves - share exchange ratio of Bandhan Bank’s 568 equity shares for every 1,000 equity shares of Gruh. Hence the ratio of this deal comes at 0.568:1. 

One can expect that this merger with Gruh Finance, is an attempt of Bandhan Bank to trim down its promoters stake in order to meet RBI’s guidelines.

Currently, the deal is subject to approval from Reserve Bank of India (RBI) and Securities Exchange and Board of India (SEBI).

Gruh Finance has total assets of Rs 15,970.97 crore with a turnover of Rs 1,687.19 crore and net worth of Rs 1,380.92 crore as on March 2018. Meanwhile, Bandhan Bank has a total asset of Rs 44,310.06 crore having a turnover of Rs 5,508.48 crore and a net worth of Rs 9,382 crore in the same period. 

Reactions! 

It was a bloodbath in both Gruh and Bandhan share price after the deal was announced. The share price of Bandhan Bank which was trading at Rs 528.65 per piece on January 07 has dropped by nearly 15% in 3 days time. 

The beating in Gruh Finance was even more severe, as the company plunged by over 25% in just three days. The stock was trading near Rs 306 per piece level on January 07 and has tumbled near Rs 228-mark by end of January 09. 

A win-win for HDFC!

Analysts are very optimistic about HDFC when they talk about Gruh and Bandhan Bank’s merger. In fact, this deal is expected to fetch about Rs 4,000 crore market cap for HDFC. With this, you might want to consider having a piece of HDFC shares, because its valuation ahead will make many investors rich. 

HDFC has been growing well with 20% loan and profit CAGR over FY15-18. Its Return on Equity (ROE) growth is at 30% along with 1.3% gross NPLs which reflects stability. 

In CLSA’s view, this stake sale helps HDFC Ltd avoid a potential conflict of interest as both the parent and HDFC were in mortgage financing and HDFC is trying to organically expand into the affordable housing segment, which formed 19% of the value of its approvals and 38% by volume in FY18.

“Also, with the valuation differential between Gruh, at a 12x FY20E PB, and HDFC Ltd, at a 2.2x adj. PB, it could become tricky for the parent to support the capital needs of the subsidiary,” adds CLSA.

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On the other hand, analysts at Motilal Oswal said, “'There has been an overlap in the business of both GRHF and HDFC Ltd, especially in the western region. HDFC could monetize its investment in GRHF at a very attractive valuation (13.3x Trailing BV). Post-deal, HDFC Ltd will have ~15% stake in the bank.”

According to CLSA, HDFC will own 15% stake in Bandhan post-merger, which notably, will need approval from RBI to retain over 10% stake or else it would need to sell-down part stake in time bound manner. 

But, the agency also explains that the transaction values HDFC Ltd’s stake in Bandhan at Rs130bn and with the cost of just Rs 0.6bn, it will lead to a large profit for HDFC (limited tax-implications). The profit equates to 16% of its FY20CL net worth or 20% of adj. net worth and +100% of PAT.

As for in Motilal’s view if HDFC sells 5% stake, “it can fetch INR40b (based on combined MCAP of INR806b on the deal value).”

What does this mean to home buyers?

Deepak Parekh, chairman, HDFC, in an interview with Anurag Shah of Zee Business told, “the merger will give birth to conflict of interest, as both of us are present in western India as non-banking companies.”

In Parekh’s view, additionally, we are engaged in offering small loans like a credit link scheme that offers a subsidy of Rs 2-2.50 lakh to first-time homeowners. Interestingly, we have won first prize in a row for doing the largest number of affordable homes under the CLSS scheme. Gruh also wants to do the same and here comes the conflict of interest between the two. 

However, analysts believe that, the Mumbai-based NBFC incrementally has been increasing share of affordable housing both in volume and value terms. This means post-merger many key developments can be expected from HDFC front for home buyers ahead. 

Currently, HDFC gives home loan up to Rs 30 lakhs to women at the interest rate of 8.90% to 9.45%. Whereas, the same loan for others category sees interest rate slightly higher between 8.95% to 9.45%.

It would also be interesting to see how will Gruh Finance and Bandhan Bank together bring in reforms for enhancing affordable housing in India.