GRUH Finance - mini HDFC


Were all of them investors?

(MD Razi G Haider) #526

Value unlock happens when any of the unit doing huge economic profit but due to others unit ,merged entity is in economic loss… When both entity are in huge economic profit along with their own Moat in their’s specialized area then there is no way of value getting locked , the merged entity will have wider competitive advantage …

(Divyanshu Bagga) #527

While both are profitable, one can argue that Bandhan’s earnings don’t have the same “quality”, that the merger heightens the economic and political risks to the earnings. Would you still stay invested?

(Marathondreams) #528

Looking at the product profile and geographical presence, this merger is perfect fit since there is hardly any overlap. So now it is up to the leadership of Bandhan to leverage the total customer base of Gruh and Bandhan to sell more products and bring out the synergy in this merger.

In the short term, market will continue to derate both the Bandhan and Gruh due to huge liquidity overhang on Bandhan for next 1-2 years. Once promoter selling is over, this can be another “Kotak” if not “HDFC” in the making.

(Varun) #529

my working for combined entity… bandhan should have about 161 cr shares post share swap. and combined profit of rs 2300 cr for the year ending 31-03-2019… (merger is effective 1-1-19)… total market cap of the company is Rs 80000 cr that means 35 PE… If I invest via GRUH its 5% discount that is PE of 33.5.

bandhan bank wont be able to expand branches as it still wont be able to make it to 40% promoter holding… so I am not sure if they can convert gruh branches to full bank branch.

the combined entity will be more stable as there are less microfinance loans… and they get the benefit from GRUHs management experience… both entities cater to similar customer base… LIG / MIG

growth should moderate as the base has become bigger… but cross selling provides huge oppurtunies. Also, huge geographical expansion.

also HDFC being 15% holder will serve the company / new bank better as they may say that it is only a financial investment but they can always benefit from HDFC management. HDFC Intend to keep atleast 9.9%…

(SMondal15) #530

Have two more points here

  1. Dont we think we have better business in the Bank-microfin space, think about Indusind-Bharat Fin.
  2. Dont we think this Bandhan Bank stake for HDFC become soft dis-investment targeg when HDFC needs fund either for its own lending business or to maintain its stake in HDFC Bank when next time HDFC Bank goes for another rounc of fund rise.


Was Gruh overvalued?

“Therefore a firm like Gruh Finance, for example which always looks very expensive it has remained probably amongst the most expensive ones for a very long time compared to its much larger brethren and sisters all around. Consistently, I found that Gruh has remained actually reasonably priced once you bring in all the right elements into the valuation.”

Gruh commanded a Price to Book of 13.5, Price to Earnings of 64 (P/E has reduced recently) on

  1. the parentage of HDFC,
  2. lowest NPA (compared with Repco home or other HFCs)
  3. low ticket size loans (compared with other HFCs)
  4. high management quality inherited from HDFC,

“However, over time, HDFC has expanded its presence in the lower income segments.
During the half-year ended Sept. 30, 2018, 37 percent of home loans approved in volume terms and 18 percent in value terms have been to customers from the economically weaker segment and low income group segments. The average home loan to the EWS and LIG segment stood at Rs 10.1 lakh and Rs 17.6 lakh, respectively. The average ticket size for Gruh Finance is Rs 9.4 lakh.
Given the similarity in loan profiles, HDFC could have eventually considered merging Gruh with itself or exiting its holding in the business. Via the deal with Bandhan Bank, it has chosen to do the latter.”


IF Gruh does not have HDFC parent, will it command the same valuation?

Is there competition for Gruh?
Yes, starting from HUDCO, Repco, Manappuram, Muthoot, many companies offer low ticket home loans
Note: HDFC is also offering low ticket loans now.

If I am correct, if Gruh can sustain same growth and valuation is the question.

What worried is without the consent of the share holders, can companies decide a share swap and merge?

(MD Razi G Haider) #532

Bandhan’s ROA,spread is better than Gruh hence certainly quality of ’ E’ is better but yes the risk (political,unsecured etc)which you mentioned need to be consider during calculating projected P/B.

(Nikhil Rodrigues) #533

Adding few more points

  1. Class leading ROE and ROA above other HFC’s for years
  2. Consistent high dividend payout of 35-40%
  3. Growth of 20-25% for years with less risk taking than other HFC’s
  4. No equity dilution even with high dividend payout and good growth

(Sandeep Patel) #534

Does the two co (merged entity) have a very solid long-term tailwind in their favour?

  • Both have been part of the rural economy for years.
  • Both have witnessed the impact of India’s financial inclusion drive first hand.
  • Both knows a shortage of bank branches across India’s hinterland had held back Indian banks’ efforts at financial inclusion.
  • The Jandhan Yojana helped bring 31.8cr people into the formal banking system in just four years, upto FY18. 17.7cr accounts were opened in rural areas. About 53% of Jandhan account holders are women.
  • Compared to the number of Indian households entering the middle-income level, the Jandhan Yojana has just scratched the surface of financial inclusion.
  • Both spotted an irreversible trend. Both realised that their scope for growth is immense. Provided they have a much bigger balance sheet, geographical presence and economies of scale.
  • Both have a natural advantage. Over the past decade both have honed their credit appraisal skills while lending to the self-employed and unsecured borrowers.
  • Both have no provisioning worries

Putting the two together, their individual strengths and their collective ability to leverage the progress of Jandhan, the merger of Gruh Finance and Bandhan Bank seems to be a win-win.

Source: Equitymaster 5 Minute Wrapup here (reformatting error, if any, is mine)

BEFORE merger

– Growth ~30%, RoE ~20%, Dividend Payout ~10%.
– Periodic equity dilution required to sustain growth rate.
– Growth ~18%, RoE ~29%, Dividend Payout 33%.
– No equity dilution required to sustain growth rate.

AFTER merger

Combined entity (Option 1):
– Say Growth ~23%, RoE ~23%, Dividend Payout nil.
– No equity dilution required to sustain growth rate.
Combined entity (Option 2):
– Say Growth ~25%, RoE ~23%, Dividend Payout 10%.
– Minimal periodic equity dilution required to sustain growth rate.

Combined entity has potential to achieve greater economies of scale, create better synergies, utilize resources optimally, deploy cash more efficiently, diversify products and expand reach.

(MD Razi G Haider) #535

You are not considering the change of management part . It is a huge matter in terms of valuation. Certainly Bandhan management is not as capable of HDFC Management in Housing Fin sector.

(zulfiqar) #536

What about sudhin choksey silent hero of gruh, and other mgt, mgt should have clarified on that point.

(S_Banerjee) #537

I will not go in depth of financial ratio analysis, people have done it extremely well in this thread. I would only say that I am tracking Bandhan(it was still not a bank then)or better to say it is coming into my knowledge willingly or unwillingly for last 15 years. They have quite a good faith in this small finance sector in lower middle class population. I would say they are doing above average business and captured a large number of population already before becoming a ‘Bank’. People are transfering their money to Bandhan bank to avail the higher interest rates after it formed as a bank. After merging Gruh finance this customer base will gradually explode if both side mngmnt will work tactfully, and I am optimistic on this.

Disc : Bandhan is my top holding,added yesterday and today more amount of shares.

(Peabody) #538

Sudir Choksey is due to retire this year

(Peabody) #539

On a net basis, ordinary investors lost money in Gruh with this meltdown. Whether it will get the past expensive valuation is highly doubtful with change in ownership

(Julian) #540

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(s) #541

Guys it is a share swap. HDFC is invested and is party to ensuring return on their investment. The stock was expensive and Bandhan was a option which they went with. There is no big deal… Business is about trying to leap frog and both Bandhan & Gruh are attempting the same. It boils down to if you have faith in the managements decision as this was the best route to grow.

(gautham1) #542

Hi Guys,
One dump question. Unlike a normal acquisition where acquirer pays X per share, this looks confusing. Because both Bandhan bank and Gruh finance share price can fluctuate until the merge happens. If I am not wrong, for bandhan it wont matter since they will issue 568 share for every 1000 share. ( Ofcourse there will be a dilution. But nothing from a price point of view). But for gruh holders it will matter because it depends on the stock price of Bandhan at that point in time.
Can someone explain?

(nagireddy1991) #543

Yes , it’s a share swap deal. There will be arbitrage opportunity if gruh falls more than bandhan bank in percentage terms