Gruh & Bandhan - a marriage made on earth that foreign investors would fancy

Optically in terms of price to book, Gruh always looked expensive with the metric in early teens. However, it would be prudent to note that the company never raised money by diluting equity which could have propelled the book value, making the ratio look way saner.

In fact let alone raising money, the company distributes more than 30 percent of its profits as dividends to the shareholders.

The root cause of the “desperate” merger seems to be in line with Bandhan’s honcho taking a step in complying to the RBI’s diktat of reducing the promoters shareholding from 80 percent to 40 percent.

With the merger, the promoter's stake drops to around 60.3 percent. The share swap ratio for the merger would be 568 shares of Bandhan for every 1,000 shares of Gruh Finance. It results in around 26 percent dilution for former’s shareholders.

Bandhan is a pretty old school in approach. Gruh, on the other hand, is very advanced on technological forefront. The two businesses are pretty different from each other’s core competency.

One is a fine microfinance lender which thanks to its low-cost CASA made a superb 22-25 percent ROE with the other being a highly efficient, zero capital needed cum 28-30 percent ROE cum nil NPA attached affordable housing financer.

Product diversification aka entry into the lucrative housing finance arena also de-risks Bandhan’s business model by some way as it is cross-selling to each other’s client base. A wider reach with a presence in the central and western part of the country is also one of the benefits that the merged entity will enjoy.

Let’s paint an unbiased post-merger scenario. It’s of one easy assumption Gruh or the housing finance business under Bandhan’s fold would grow way faster. The cost of funding which was 7.6 percent for Gruh would come down considerably.

Bandhan being a bank can leverage to the core though it needs to maintain the SLR and CRR (which Gruh wasn’t required to). Cumulative ROE and ROA can inch up to around 25 percent and 3.8-4 percent respectively.

The share of Bandhan’s unsecured loan book will decline to 57 percent versus 86 percent as of first half of the present fiscal. The average tenure of the loans for the merged entity would go up as Bandhan usually provides 1-year loans versus 3 years of Gruh. How will the merged entity cope with cultural differences and organisational challenges, would be a thing to watch out for.

Our View:

In the longer run, anyone looking to come and invest in India would fancy the merged entity for their core portfolio in all probability.

The merged company is bound to attract a higher P/B as it will be a segment leader with tailwinds. However, in the shorter term, there could be a lot of uncertainties that may prevail in the bourses.

The same can cause an overhang in the Bandhan stock price making it an underperformer. There’s nothing forthcoming for a minority shareholder though as the merged entity trades over 5x P/BV their fy20 expected numbers.

(The duo hail from ‘The City of Joy’, Kolkata, and are experts in picking multibaggers. Arun Mukherjee, a college dropout by choice, entered markets at age of 14. Mukherjee also happens to be one of most followed investors on Twitter with over 43,000 followers. His partner, Soumya Malani, who holds masters from London School of Economics and Political Science (LSE). He has been ruling the social networking platforms for his multibagger hunting skills. They would be sharing their knowledge with Moneycontrol on various topics relevant for investing in Indian markets.)

Disclosure: Arun Mukherjee and Soumya Malani have no vested interest in any of the companies mentioned in the article. Arun Mukherjee can be reached @Arunstockguru, and Soumya Malani @insharebazaar.

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