ICICI Direct is bullish on Bank of Baroda has recommended buy rating on the stock with a target price of Rs 140 in its research report dated January 03, 2019.
ICICI Direct's research report on Bank of Baroda
Bank of Baroda announced swap ratios for the merger with Vijaya Bank and Dena Bank. As per the announcement, every 1000 shares owned in Vijaya bank & Dena bank will receive 402 & 110 shares respectively of BoB. The swap ratio values Dena bank at ~Rs 3000 crore (25% discount to 2nd Jan 2018 Mcap) & Vijaya bank at ~Rs 6266 crore which is close to 5% discount to its market cap. The swap ratios as announced will lead to 22% dilution vs 25% dilution estimated for the merged entity and ~ 29% vs 32% estimated on existing BoB equity capital. Therefore, merger has proved prima facie beneficial for Bank of Baroda. The merger is effective from FY20E as it merged entity will be functional from 1st April 2019. We have made broader calculation from FY19E, assessing the impact of the merger. On a proforma P&L and BS calculation and announced swap ratios, we expect FY19E ABV and FY20E ABV at Rs 73 and Rs 90 per share for the merged entity. This is quite lower than existing standalone ABV of BoB which has been factored in current market price.
Therefore, considering the merger ratio remaining favourable towards BoB, we marginally upgrade our target price to Rs 140 per share (valuing at 1.5x FY20E ABV). Integration issues and strong leadership will remain key challenges ahead. Higher than expected synergies benefit and lower Gsec yield may lead to faster improvement in return ratios. We expect RoA of 0.5% and RoE of 9.3% by FY20E. We maintain our BUY recommendation with a long term view.
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