Ujjivan Small Finance: 18% guaranteed return, but no takers. Why?

The term Ujjivan means revival and both Ujjivan Small Finance Bank (USFB) and Ujjivan Financial Services (UFS) appear to be living up to their name. The stocks have risen close to 2.5 times since March this year, ahead of the impending merger of the two companies. Under the swap ratio announced in October last year, a shareholder in UFS will get 11.6 shares of USFB.

Till the first week of September, the share prices moved in tandem, factoring in the eventual merger. But over the last one month, UFS shares have been rising at a much faster rate. So much so that there has been a gap of between 15-18 percent. On Tuesday, UFS shares closed at Rs 581 and USFB at Rs 59. Considering the merger ratio of 1:11.6, either UFS should be at Rs 684 or USFB at Rs 50.

Simply put, investors holding shares of UFS stand to make an easy 18 percent once the merger goes through, or so it seems. This is puzzling to traders who have been buying UFS to benefit from the arbitrage. The anomaly is there for all to see and ideally, the gap should have immediately closed. But it remains. That means some smart players are giving the opportunity a pass. One of the reasons could be a concern that the merger process may take longer to go through than expected. Remember, the merger cleared the ratio announced in October last year, and the EGM for shareholder approval is still another month away. If the delay is the worry, then the 18 percent may not seem attractive, as traders can deploy their money elsewhere for a better return.

Secondly, much depends on how the market perceives USFB's valuation in the months ahead, considering that it will be the surviving entity post-merger.