MOSL: CAPITAL FIRST (Buy)-Into a different league-A win-win combination
Capital First: Into a different league; A win-win combination
(CAFL IN, Mkt Cap USD1.3b, CMP INR836, TP INR960, 15% upside, Buy)
- 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.
- While the merger would result in dilution of BVPS for IDFCB in the short term (INR41/44 in FY19/20E v/s INR48/51 earlier), we believe its growth and RoE profile would improve significantly post consolidation. We have a BUY rating on Capital First and revise target price to INR960 (earlier INR925) - 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.
Swap ratio favourable for CAFL shareholders: IDFCB and CAFL have entered into a share swap arrangement at a ratio of 139 shares of IDFCB for 10 shares of Capital First. At the CMP of IDFCB, this implies a value of INR940/share for CAFL - translating to 3.1x FY19E BVPS. This is a healthy (12.5%) premium to current market price. This deal would result in 40% equity dilution for IDFCB shareholders.
Capital First Ltd. Capital First Limited is an India-based financial company, which is focused on providing debt financing to micro, small and medium enterprises (MSMEs) and Indian consumers. The Company's products include personal loans, business loans, loan against property, two wheeler loans, pre-owned car loan and insurance. The Company also provides other credit granting services. The Company provides financing for various purposes, such as business expansion, loans for plant and machinery, office furniture, display panels, office automation (such as personal computers), laptops and printers. The Company offers consumer durable loans for digital products, such as cameras and accessories, laptops and desktops, and mobiles and tablets, and non-digital products, such as television, refrigerator, air conditioner, microwave, washing machine and audio. The Company, as a corporate agent, also distributes life insurance products and general insurance products offered by insurance companies.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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