Shares of both HDFC Bank Ltd and Centurion Bank of Punjab Ltd (CBoP) fell on Monday, after the announcement of the swap ratio for their merger. CBoP shares went down 14.5% on the Bombay Stock Exchange (BSE), while HDFC Bank fell 3.5% on a day when the BSE Bankex was down 0.4%. CBoP shares were expected to fall, since the market prices were out of line with the merger ratio. But the ratio cannot be unfavourable for both banks and the fact that the HDFC Bank scrip, too, has come under pressure is an indication that investors believe that the premium valuations attached to HDFC Bank may not be justified after a merger with a weaker bank.
It’s true that there are short-term concerns. Apart from the 18.2% dilution as a result of the swap, HDFC had a 23.28% stake in HDFC Bank and the merger will lower that stake to 19.7%. A preferential issue will be made to increase the parent’s stake back to its original level, which means there’ll be another small dilution in equity. There are concerns not only about CBoP’s non-performing assets but also about the fact that they have been rising. The integration of Lord Krishna Bank could also be challenging, because of its very different culture. In short, there are plenty of hurdles that HDFC Bank will have to overcome in the short term. It may also be true that CBoP’s valuation has been rich, but that merely reflects the fact that opportunities for inorganic growth in the industry are scarce and command a premium.
The fact remains, however, that HDFC Bank is increasing the number of its branches by 50% while diluting its equity by 18%. And, as mentioned in this column on Monday, there’s substantial scope for expanding business from CBoP branches so that they come up to the level of the average HDFC Bank branch. The market seems to be assuming that the CBoP branches will drag down the performance of the combined bank. Notice, however, that HDFC Bank diluted its equity by 11% between end-March 2007 and end-December 2007, but quarterly earnings per share, which was Rs10.90 in March, rose in the December quarter to Rs11.90. While the merger will undoubtedly be a drag on earnings in the short term, if HDFC Bank is able to keep up its reputation of being a “30% bank”—delivering a 30% growth rate in net profit year after year—that should be sufficient to overcome the dilution impact within a year.
Pfizer India’s financial performance worsens
Drug firm Pfizer India has reported a 22.4%?drop in operating profit for its fourth quarter ended November 2007. In the first three quarters, profit had declined at a much lower rate of 1.8%. Pfizer shares, nevertheless, were flat in Monday’s trade, as they’ve already been battered in the recent market correction. The firm’s share price?has fallen?about?22%?this year, in line with most multi-national pharma stocks.
The company had ended 2007 on a high, announcing the sale of four brands from its consumer health division for Rs215 crore. Analysts tracking the company were positive about the deal, as they estimated the proceeds to be at least two times annual sales and because a part of the consumer health division was retained. This business accounted for about 20% of sales, but about one-third of total profit.
The uncertainty relating to the sale of this business affected the firm’s performance the last fiscal year. For the year as a whole, sales grew by just 1.6% and core profit fell about 4%. Thanks to a property sale, the company managed to report a 220% jump in net profit. The sale of the consumer health-care brands would boost profit this financial year as well.
But based on core profit, Pfizer trades at about 14 times its earnings for the next one year, leaving little reason for investors to get excited about the stock.
Rel?Power loses Rs19,400 crore after bonus
Accepted wisdom is that a bonus issue to shareholders, regardless of the fact that it leaves out promoters or not, does not change the underlying value of the firm. In many cases though, the market capitalization of a firm tends to inch up, based on the confidence shown by the company management that it can service a higher equity base.
But Reliance Power Ltd is a special case. Before the company had proposed its liberal 3:5 bonus issue, it had a valuation of Rs86,900 crore. Now, it’s valued 22% lower at Rs67,500 crore (calculated as the current value of free float capital,?Rs10,276 crore, divided by the post-bonus minority holding of 15.22%). During the same period, Tata Power Ltd shares have risen about 4%?and NTPC Ltd shares have remained flat. What gives?
Investors who were allotted shares in the issue seem to be just keen to sell and get out as close to their cost of acquisition as possible. This explains the deluge of sellers on Monday—shares marked for delivery were higher than usual at 15.6 million shares on both exchanges.
In any case, when investors had applied for the issue, the ploy was to profit from listing gains and it was hardly based on fundamentals. But these plans went awry after the market crash in mid-January, and the view now seems to be to exit with the lowest possible loss. In the process, valuations stand reduced by more than one-third compared with the public issue valuation of Rs1.02 trillion.
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