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Buy Bandhan Bank; target of Rs 575: ICICI Direct

January 08
15:26 2019

ICICI Direct’s research report on Bandhan Bank

Bandhan Bank has announced amalgamation of Gruh Finance with Bandhan Bank on January 7, 2019. As per the proposed merger involving 100% share swap, 568 shares of Bandhan Bank will be issued for every 1000 shares of Gruh. Post the merger, HDFC Ltd, the promoter of Gruh, will hold~15% in Bandhan Bank while Bandhan Financial Holding’s (BFHL), the promoter of Bandhan Bank, stake would come down to 61% from the current 82.3%. As of closing price on January 7, the swap ratio is at a discount of ~7% for Gruh shareholders. In September 2018, as the promoter shareholding remained high at 82%, RBI had said the general permission to open new branches stood withdrawn while new branches could be opened with RBI approval. Also, the regulator has mandated freezing the remuneration of the MD & CEO at the existing level (Rs 2.4 crore as of FY18 annual report), till further notice. We expect these restrictions to be removed soon by RBI and receive relaxation on further dilution.

Outlook

We value the merged entity at 5.5x revised BV of Rs 104. Hence, we revise our target price to Rs 575 from Rs 650 earlier led by higher dilution. We believe that though the merger is short-term negative due to high dilution, it will be positive from a longer term perspective on a core business basis. One can gradually accumulate from a two to three year perspective. We maintain BUY recommendation on the stock. Robust growth, better than banking margins and low cost to income still continue to remain strong attributes of the bank.

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