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MOSL: Morning India (15/January/18)-1. Capital First; 2. Infosys; 3. PC Jeweller; 4. H T Media; 5. EcoScope

MOrning India (15/January/18): 1. Capital First; 2. Infosys; 3. PC Jeweller; 4. H T Media; 5. EcoScope

Today’s top research idea

CAPITAL FIRST: Into a different league;  A win-win combination

• 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.
• 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.
• 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.

Piping hot news

IDFC Bank-Capital First may have to raise Rs 4,000 crore to meet norms

• The proposed merger between IDFC Bank and Capital First, more than a third owned by private equity firm Warburg Pincus, will require the merged entity to raise as much as Rs 4,000 crore to meet regulatory obligations on liquidity while the buyout firm may have to cut its stake by half a percentage point or so. The new bank has to buy more government bonds to meet the statutory liquidity ratio (SLR) and set aside funds as cash reserve ratio (CRR), the proportion of deposits that banks have to maintain with the Reserve Bank of India (RBI).