The First Corporate Merger of 2019 Supports this Irreversible Trend - The 5 Minute WrapUp by Equitymaster
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The First Corporate Merger of 2019 Supports this Irreversible Trend

Jan 8, 2019

Tanushree Banerjee, Editor, The 5 Minute Wrapup

HDFC. Gruh Finance. Bandhan Bank.

These 3 companies have quite a few things in common. The most important among them are impeccable track records and far sighted managements.

So, I'm not surprised these companies announced a merger.

But did you know they have a very solid long-term tailwind in their favour? I'll get to that in a minute.

Bandhan Bank's decision to acquire Gruh Finance, one of the most healthy and profitable housing finance companies in the country, like its parent HDFC, is not just based on growth. And certainly not to only reduce the promoter's stake. Rather the managements of Gruh Finance, HDFC and Bandhan Bank are already preparing to leverage tailwinds that their competitors are yet to recognize.

Both Gruh Finance and Bandhan Bank have witnessed the impact of India's financial inclusion drive first hand. Rather, both have been part of the rural economy for years. The former offered mortgage credit and the latter - micro loans to the unbanked population.

But a shortage of bank branches across India's hinterland had held back Indian banks' efforts at financial inclusion.

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The Jan Dhan Yojana changed all that.

Launched in August 2014, the first phase of Jandhan Yojana focussed on opening basic bank accounts. It offered RuPay debit card with in-built accident insurance cover of Rs 0.1 million. Besides, it provided basic banking accounts with overdraft facility of Rs 5,000 after six months.

The Jandhan Yojana helped bring 318 million people into the formal banking system in just four years, upto FY18, according to the RBI. 177 million 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.

Needless to say, Bandhan and Gruh spotted an irreversible trend. Both Bandhan Bank and Gruh Finance realised that their scope for growth is immense. Provided they have a much bigger balance sheet, geographical presence and economies of scale.

Compared to any other large public or private sector banking entity, Bandhan Bank and Gruh Finance have a natural advantage. Over the past decade both the entities have honed their credit appraisal skills while lending to the self-employed and unsecured borrowers.

So, even at a time when the sector's NPA levels are close to historic peaks both the entities 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 for both shareholders. HDFC which remains a big stake holder in the combined entity, also has a lot going in its favour.

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Thus, the first corporate merger of 2019 is not just an example of healthy entities joining hands. Rather it points to one of the many irreversible trends that I have been studying for the past few months.

How can you identify such stocks?

Don't worry, dear reader. I've been working on identifying such massive opportunities for you.

And I'll share the exciting details with you soon. Watch this space...

Chart of the Day

Mergers and acquisitions are typically evaluated based on the synergies of the businesses and valuations offered. Rightly so.

But apart from that they also need to be evaluated based on whether the deal is only focused on growth or even strengthening the moat of the combined entity. And whether the deal is a win-win for shareholders of both the entities.

Turns out Bandhan Bank's acquisition of Gruh Finance is a winner on all counts. Not that the bank has struck a bargain in the share swap ratio. Rather Gruh Finance has been richly valued. But Gruh Finance could help Bandhan become more than a bigger bank.

Although HDFC (parent of Gruh Finance) is not directly involved in the deal, it is evident that both HDFC and Bandhan Bank want a bigger share of the rural pie. The exponential growth that rural banking has witnessed over past few years offers huge scope. Especially, for entities with proven credit appraisal history.

The Potential that HDFC and Bandhan Bank Tapped Into...

Warm regards,

Tanushree Banerjee
Tanushree Banerjee (Research Analyst)
Editor, The 5 Minute WrapUp

PS: Tanushree Banerjee is Equitymaster's co-head of research and editor of StockSelect. She has a long and illustrious track record of picking safe stocks. For over 16 years, StockSelect subscribers have received safe stock recommendations that delivered double and triple digit gains. You can receive Tanushree's safe stock recommendations by signing up here.

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