Share swap ratio for merger favours IDFC, stock likely to open higher

Analysts expect the spread to contract as the merger progresses. The merger is likely to be completed in 12-15 months.

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The IDFC stock is likely to open in the green on July 4 after the company declared the share swap ratio for its long-awaited merger with the banking arm.

The boards of IDFC Ltd and IDFC First Bank finally announced the share swap ratio for the merger of the two on July 3. Shareholders of IDFC Ltd will get 155 equity shares of IDFC First Bank for every 100 equity shares held.

As of July 3 closing price, IDFC Ltd shareholders are getting a premium of 17 percent. The IDFC stock rallied 7 percent on Monday, indicating a premium of 24 percent, based on the Friday (June 30) closing price.

IDFC Ltd closed at Rs 109.90 on the NSE and IDFC First Bank closed at Rs 81.70 on July 3.

Analysts expect the spread to contract as the merger progresses. “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 percent then it’s a good level to enter but that looks unlikely to happen,” Abhilash Pagaria of Nuvama Alternative & Quantitative Research said.

The merger is likely to be completed in the next 12-15 months.

IDFC, through its non-financial holding company, holds 39.93 percent stake in IDFC FIRST Bank. After the merger, the book value per share of the bank will increase by 4.9 percent, as calculated on audited financials as of March 31, 2023.

“Book value of IDFC First in Q4 FY23 was Rs 39. A 5 percent jump post-merger will take it to Rs 41. This means a price-to-book value of 2x,” according to Aditya Kondawar, Partner, Compcircle.

The bank in the filing said that the merger will lead to simplification of the corporate structure of IDFC FHCL, IDFC Limited and IDFC FIRST Bank by consolidating them into a single entity and will help streamline the regulatory compliances of the aforesaid entities.

“The merger will help create an institution with diversified public and institutional shareholders, like other large private sector banks, with no promoter holding,” the bank said.

IDFC First Bank’s deposit franchise has recorded a four-year compound annual growth rate (CAGR) of 36 percent since the merger to reach Rs 1.36 lakh crore by March 31, 2023. The bank has increased its current account and savings account (CASA) ratio from 8.6 percent from the time of its merger with Capital First in December 2018, to 49.77 percent till March 2023.