News Analysis

An expensive deal for Bandhan

Radhika Merwin BL Research Bureau BL Research Bureau | Updated on January 07, 2019 Published on January 07, 2019

But acquiring Gruh’s strong and quality business should pay off in the long run

In a bid to comply with the RBI’s norms and to bring down promoter stake, Bandhan Bank has struck an expensive deal by acquiring Gruh Finance. The swap ratio values Gruh Finance, one of the pioneers in rural housing finance segment, at about ₹20,850 crore, implying a multiple of 11-12 times forward FY19 book value. This will pare Bandhan’s promoter stake to 60.9 per cent in the new combined entity.

For Gruh, which boasts a market capitalisation of around ₹22,400 crore on Monday’s closing price, the swap ratio, valuing the company at a discount of 7-8 per cent, is likely to see some knee-jerk reaction on Tuesday, with Gruh slipping in trade.

For Bandhan, the price it has paid (if the deal goes through) for complying with the RBI’s norms has proved to be an expensive one, which may not go down well with investors. Given that it will still have to bring down promoter stake to 40 per as per RBI’s norms, overhang on the stock will remain in the near term.

Also, after the deal, HDFC (promoter of Gruh) will hold a little under 15 per cent stake in the new entity, which may need to be reduced to about 10 per cent if the RBI directs so. This will also keep investors in Bandhan on tenterhooks. Hence, Bandhan’s stock may reflect some of these headwinds on Tuesday.

Cultural mismatch

That said, from a long-term perspective, acquiring a strong and quality business like Gruh is likely to pay off. Cultural mismatch and integration issues aside, the deal would be earnings accretive in the long run.

Niche offerings and the Centre’s focus on the affordable housing segment have kept Gruh Finance’s earnings in good stead over the years. Gruh Finance provides small-ticket home loans to low-income group in semi-urban and rural areas.

Thanks to a healthy growth in loans and stable asset quality, the company has delivered 26 per cent growth (CAGR) in earnings over the past five years. Gruh Finance’s loans have grown by 22 per cent annually between September 2013 and September 2018. The Centre’s various initiatives for the affordable housing segment present huge opportunity for players such as Gruh Finance, which has an average loan size of about ₹8 lakh.

Gruh Finance has been able to maintain very low loan delinquency. The company’s gross non-performing assets (GNPAs) stood at 0.8 per cent as of September 2018 quarter. Hence, Bandhan acquiring such a quality business should be earnings accretive in the long run.

Gruh merging into Bandhan will also lead to synergies. Healthy profitability, good asset quality, success in scaling up low-cost deposit base, and strong presence in underpenetrated markets have been positives for Bandhan. But diversification into other loans (non-MFI only 14 per cent of loans) is imperative to scale up. Acquiring Gruh should help it diversify its loan book (58 per cent micro loans).

The bank’s progress in garnering low-cost deposits has been particularly striking. Bandhan has been able to garner about ₹32,959 crore of deposits as of September 2018.

Gruh, thanks to its strong parentage of HDFC and funding from National Housing Board (NHB), has been able to enjoy low-cost funds. If Bandhan continues to grow its low-cost deposit base, cost of funds in the new entity after acquiring Gruh’s assets should remain sanguine, aiding margins.

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