IDFC - Infrastructure Development Finance corporation

Stock Opportunities Special Situations
179

Built a sheet for evaluating the current Holdco discount and potential swap scenarios for upcoming mergers in IDFC, Equitas & Ujjivan. One can download the sheet and change their assumptions according to their thesis and get Holdco discount, Bank Book value increase,Valuations.

Download Link: Sheet

Thesis on which sheet was built:

  1. IDFC-IDFC First Bank Merger:

  • IDFC Ltd will sell the AMC Business & cash proceedings will be used to swap with IDFC First Bank shares. - AMC sale proceedings & Swap Price can be edited in sheet.

  • IDFC Ltd then merged with IDFC First Bank with some discount- Swap rate can be adjusted in the sheet.

  1. Equitas & Ujjivan- will have a plain vanilla meger with the their respective banks with some discount.
  2. Since equitas has declared a holdco discount of 3.6% i have used a similar rate for IDFC & Ujjivan in the sheet- This can be changed based on your thesis in the actual swap ratio input.
  3. Final merger creates value to Holding company & Bank shareholders in 2 ways.

  • Swap Ratio: The ratio which will be decided by the board based on independent valuer at some discount to what they are holding. - This will benefit the Holdco shareholders by reducing the holdco discount.
    eg: Equitas Holds Equitas bank shares in ratio 100:273 but, final ratio is at 100:226.

  • Book Value Increase: Since the merger swap ratio is at a discount, some shares will be removed from total shares- this will result in book value increase for residual bank shareholders so, Holdco & Bank Minority shareholder will benefit from the book value increase.
    From Equitas example, since 273-226=47 shares of Equitas bank shares were removed for every 100 Holdco shares, this will increase the book value of bank shareholders by 16.46%.

  1. Edit Only Green boxes.

Summary of Observations:

  1. Considering merger at below holdo discounts- IDFC Ltd seems to be trading at super cheap valuation, If IDFC merger discount is less than 4.22%, then current valuation is <1 P/B [This discount is expected due to uncertainity in AMC sale timelines]
Iteam Units IDFC Ltd Equitas Holdings Ujjivan Holdings
Total Holdco Discount % 4.22% 3.68% 3.64%
Bank Current Price Rs 53 63.2 28.8
Post Merger P/B # 1.41 1.82 1.42
Holdco Price Rs 58 131 240
Post Merger P/B # 1.03 1.67 1.22
  1. In terms of Bank Minority Shareholders, Ujjivan seems to have the highest Upside in terms of BV Increase, followed by Equitas and IDFC Ltd. This is expected since shareholding of Holdco in the Bank are in this order.
IDFC Ltd Equitas Holdings Ujjivan Holdings
Total BV Increase 11.82% 16.46% 18.19%
  1. Only IDFC First Bank will have tangible value interms of increased networth boost on aggregate level,This will help them in expanding their balance sheet by 30,000cr without raising new capital. In Equitas and Ujjivan- It’s just capital structure changes without any business impact.
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