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Capital First Stock Jumps On Merger Plan With IDFC Bank. Five Things To Know

The Capital First -IDFC Bank merger deal has valued the NBFC at a premium of 12.5% on the current price. It is noteworthy that in the past five trading sessions, the Capital First stock has already run up by 11%.

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Capital First Stock Jumps On Merger Plan With IDFC Bank. Five Things To Know

Capital First shares jump on Monday


The shares of Capital First jump on Monday, while IDFC Bank stock posted marginal losses after the two companies announced a merger in an all stock deal. The deal has valued Capital First at a premium of 12.5% on the current price. It is noteworthy that in the past five trading sessions, the Capital First stock has already run up by 11%. At 1.10 pm, capital first shares trade at Rs 864, 3.3% higher (while it had surged 7.9% to trade at Rs 902 in the intra-day trading on BSE) while IDFC shares trade at 66, 2.96% lower than the previous session's closing.

Five Things To Know About The Capital First-IDFC Bank Merger

1. The Boards of IDFC Bank (IDFCB) and Capital First (CAFL) have approved a merger of the two entities at a 13.9:1 swap ratio. "We believe this merger would have benefits for shareholders of both companies, though near term regulatory & integration challenges persist. The share swap ratio makes it attractive (12.5% premium to CMP) for CAFL shareholders. Benefits to IDFCB shareholders will accrue more over a medium to long term perspective. On our proforma merged numbers, we expect 20bp/200bp higher ROA/ROE for IDFCB by FY21. Without factoring in cost related synergy benefits, balance sheet realignment would drive 4-5% higher profitability for combined entity, " reads a Motilal Oswal report.

2. Motilal Oswal report gives a "Buy" rating on Capital First and revise target price to Rs 960 (earlier Rs 925) - 2.7x FY20 BV. "We expect share price of CAFL to largely track the price of IDFCB in the ensuing quarters. We have a neutral rating on IDFCB," reads the report.

3. There are several benefits of the deal to Capital First shareholders. There is a healthy premium (12.5%) to the current market price. There is a requirement of lower liquidity on balance sheet - Typically 10-12% of total assets of CAFL which led to drag on earnings. There will be reduction in the funding cost, 1 percentage point lower with better credit rating of IDFCB (AAA by ICRA) and access to retail liabilities.

4. The merged entity will have to borrow Rs 6,000-Rs 10,000 crore additional (after knocking off excess liquidity sitting on CAFL balance sheet) over FY19-21 to take care of CRR/SLR requirement. This would have negative drag of Rs 100 crore-Rs 150 crore on earnings over FY19-21

5. Execution still remains a key challenge, believes the Motilal Oswal report. Post conversion from NBFC to bank, IDFC Bank has seen rapid changes. "It has grown from a pure infra lender to across spectrum corporate lending; acquisition of MFI and now merger with Retail NBFC," the report says.

 


 


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