IDFC First Bank falls as merger ratio favours IDFC: Can the bank make it to MSCI index?
According to Nuvama Alternative Research, IDFC First Bank is the top probable contender for MSCI August 2023 Standard Index inclusion. However, the stock needs to rally close to 10 percent from current levels
As of July 3 closing price, IDFC shareholders are getting a premium of 17 percent. The IDFC Ltd stock had already rallied 7 percent on Monday. This indicates a premium of 24 percent based on Friday's (June 30) closing price.
As the risk-reward ratio is favourable for the parent, IDFC Ltd surged 2 percent on July 4 while IDFC First Bank fell 5 percent. At 11:15 am, IDFC First Bank stock was quoting at Rs 79.25 on the NSE, lower by 3.25 percent from the previous close.
Currently, IDFC Limited through its non-financial holding company holds a 39.93 percent stake in IDFC FIRST Bank. Post the merger, the book value per share of the bank would increase by 4.9 percent, as calculated on audited financials as of March 31, 2023.
Can IDFC First Bank make it to MSCI?
According to Nuvama Alternative Research, IDFC First Bank is the top probable contender for MSCI August 2023 Standard Index inclusion. However, the stock needs to rally close to 10 percent from current levels to touch Rs 85 per share by the third week of July.
"Only then can it make the cut for inclusion. This (price) is as per the latest global cut-off levels and please note cut-off levels keep changing on a daily basis. The potential inflow could be $170 million to $180 million," Abhilash Pagaria, Head, Nuvama Alternative & Quantitative Research said.
The merger is expected to complete this year. As the merger progresses, the spread between the two stocks as per the ratio is expected to contract, he added.
“We will recommend any spread trade only when spread is at adequate levels as per the merger closure timeline," Pagaria said.
Meanwhile, IDFC Ltd is sitting on Rs 600 crore of cash which will come into IDFC First Bank post-merger, said V. Vaidyanathan, the managing director and CEO of the bank to CNBC-TV18.
"We will raise capital worth Rs 2,000 crore by FY24. Capital adequacy will rise further from current levels of 17.4 percent," he said.
"We expect the spread to contract at Wednesday's opening itself, thus, we will recommend any spread trade only when spread is at adequate levels as per the merger closure timeline. Hypothetically, if spread is available at 13-14 per cent, then it’s a good level to enter but that looks unlikely to happen," Nuvama said in a note.
The IDFC-IDFC First Bank merger news came days after Housing Development Finance Corp Ltd merged with HDFC Bank in a $40-billion deal, the largest in India's corporate history.
The merger completion should take anywhere around 12 to 15 months from now. Nuvama cited recent two BFSI merger instances where the merger formalities took 12-15 minutes to complete. The first was the HDFC twins, which will get completed in 15 months. The second was the merger of Shriram Transport Finance Company and Shriram City Union Finance that got completed in 12 months
