GRUH Finance - mini HDFC


(Amit Jain) #588

Gruh Finance has been beat and shareholders are feeling a shock like no other. A great brand, a great business, people were ecstatic at PE 60, and it seemed somewhat alright too, but now the stock is at PE 35… who knew that it was all hanging on a fine thread.

Gruh still has great numbers, could you guys please shed some light on the prospects of the company, its near future and a proper valuation. Its peers, Can Fin homes, PNB HF, LiC HF are trading around PE 10 to 15.


(sainkar) #589

Announcement of its merger with Bandhan Bank has turned as Black Swan event for it.

With Bandhan Bank there are lot of synergies but only time will tell the upcoming picture. With current valuation it will give market leader but won’t enjoy high PE status in future.


(rkoti) #590

I have worked in 2 organizations where there were mergers and they didn’t turn out well. Integration takes a long time and the story doesnt always work out. During all this time of confusion, competitors are working in BAU mode.
I sold off all my holding on this news. Not happy, but this is how life is.

Will consider to buy the merged entity later when the story and reality are clear.


(Multiplier777) #591

My two bits.

A lot depends upon your horizon. Is your investment horizon the next 6 months/one year or a multiyear hold?

Without doubt, it was fantastic to be holding Gruh as a stand alone company. Very well managed business, top parentage, clear horizon with many-many years of growth ahead, competitor intensity likely to reduce, past track record etc etc. It was difficult to find fault with the business. But since you are in the stock market, you have to be ready for surprises.

I know I may be accused of being fatalistic but being forced to become a shareholder of Bandhan Bank may not be such a bad outcome. Bandhan promoters are also considered clean with good corporate governance (Mr Ghosh is a humble man, is what I have read), amazing casa (41% of deposits), growing faster than Gruh (during the last Q, loans grew 46%, deposits grew 37% while operating profit before provisions grew 56%- ILFS type provisioning of Rs 385 cr will hopefully not be repeated; reasonable net npa at 0.7%). What gives confidence about the quality of promoters & their conservativeness is that they willingly took FULL provisioning of Rs 385 cr in the last quarter.

In my view, it will take a few quarters for things to settle down. The March 2019 quarter should again result in very strong pat growth for Bandhan (ILFS provisioning will be behind and last Q is generally a strong one). A few more quarters of solid growth will make investors forget the shock of the merger. Many disappointed Gruh investors would have sold off and the selling pressure would reduce. Frankly, Gruh should start growing faster under Bandhan will a new geography to do business in and lower cost of funds due to Bandhan’s casa deposits. The combined microfinance business of Bandhan and housing finance business of Gruh should hopefully turn out to be great combination.

Markets hate uncertainty. The way I look at it is that at times like these, one has to do a ‘Rip Van Winkle’, in the story where Rip Van slept off and woke up after many many years.

This too shall pass.


(Amit Jain) #592

Well expressed, with a proper measure of words.

From where can I confirm this?

Furthermore, Bandhan and Gruh is likely to be a good “bandhan” for shareholders. However, investors cannot afford to invest and forget this one till the current situation of reducing liquidity reverses, as growth will be slow in credit related businesses.

Market punishes those stocks the most, who’s PE is being derated and EPS is reducing. Gruh finds itself in that spot. Which brings me back to my question, will Gruh trade near the PE of its rivals: Can Fin homes, PNB HF, LiC HF? Is there is a compelling reason for investors to pay anymore than a nominal premium?


(thecroc) #593

Hi @jamit05 ,
You are pointing a very valid risk, which is a short term risk I feel as well. Gruh valuation multiple may contract, as the HDFC parentage is gone, and that in turn creates an arbitrage opportunity/gap between bandhan and gruh share price - which in turn may lead to correction in Bandhan. I know I am speculating here so I want to declare that its just feeling like a risk factor for the price in the short term.
Not invested in Bandhan / Gruh .


(AvinashMb) #594

Yeah I second your thoughts. If the investment horizon is longer than 2years I see that this is a good time to add Bandhan Bank.


(Multiplier777) #595

It is important not to lose sight of the fact that 1000 shares of Gruh will give you 568 shares of (Bandhan + Gruh) business. Gruh as a standalone entity will not exist after the next few months so debating whether Gruh will retain its high P/B multiple is irrelevant. You will have to take a view whether you are interested in holding the (Bandhan +Gruh) combined business with its two main verticals of microfinance & housing finance with their financial parameters post-merger (my analysis below).

Interestingly, by buying Gruh at the current price, you will be getting Bandhan shares at a discount of around 8%. This discount is likely to narrow as the merger date approaches.

Attaching the con call where Bandhan has mentioned that they have taken a 100% provision of the ILFS Rs 385 cr loan. If the provision was not taken, net profit would have been up by 93% (Page 3).

My number crunching in the excel attached. PE of 29x as on March 31, 2019 and PE of 24x as on March 31, 2020. P/B of 4.7x as on March 31, 2109 and 3.9x as on March 31, 2020.

I am happy to hold on.

Assumptions:

  1. Bandhan continues to pay Rs 1/share as dividend
  2. Historically, last Q profit for Bandhan contributes 29% of full year PAT. Last Q for Gruh contributes 36% of full year PAT. Have taken more conservative levels for last Q PAT for both companies for calculating FY2019 PAT levels.
  3. FY2020 PAT of combined company grows at 22% (in my view, it should grow faster than this). Gruh’s PAT grew 22% in FY2018. Bandhan’s PAT grew 21% in FY2018 (IPO was in March 2018 and Bandhan has been growing faster after IPO capital raising; 1st 9 mth 2019 PAT growth of 35% despite ILFS provisioning; Gruh’s 1st 9 mth 2019 PAT has grown slower at 16%).

Bandhan Gruh Projected Financials.xlsx (10.0 KB)
Bandhan Con call Jan 2019.pdf (482.5 KB)


(us121) #596

What about LTCG applicable based on Real old purchase price of Gruh and not Grand fathering price of 31jan 2018? This will hv high negative impact.


(Vikas Pandey) #597

I am also confused on this issue , I bought gruh 3 yrs back , there was a bonus last year and now this bandhan event , if i sell after 2 more years how will the LTCG be calculated on sale of bandhan


(Varun) #598

if you sell before the merger, you will get the benefit of grandfathering and LTCG will be calculated considering this, however, in case your shares get converted to Bandhan, grandfathering clause will not be available, rest calculation of LTCG will be normal


(yourraj) #599

What will be the Effect of it apart from increasing the liquidity ???


(Multiplier777) #600

The outstanding number of shares of Gruh is around 73 crore. Thus the additional 0.9 crore esops will just add 1.23% to the existing number of shares which is not worth fretting about.

I believe that Bandhan-Gruh would like to retain Gruh’s existing top and middle management post merger and thus this decision to increase the number of esops to be granted. Overall, a wise decision.

If you go down the Postal Ballot Notice on page 7, it mentions:

"The maximum dilution that could take place in future, if all the aforesaid options are exercised, would not exceed 1.25% of the expanded issued and paid-up share capital of the Company, taking into consideration the un-exercised stock options as on date. "