IDFC First Bank merger not to dent stock's MSCI inclusion prospects; $170-180 million inflows likely

IDFC First Bank stays a top probable contender for MSCI August 2023 Standard Index inclusion and that its merger announcement with IDFC should not dent its inclusion prospects, said Nuvama Institutional Equities. At Rs 81.70 on Tuesday, the brokerage said IDFC First Bank stock needed 4 per cent jump to about Rs 85 level till the third week of July to make the cut for the inclusion. If included, the stock may attract $170-180 million inflows, said Abhilash Pagaria, Head, Nuvama Alternative & Quantitative Research.

Putting all speculation to rest, IDFC First has finally announced the merger swap ratio with IDFC Ltd, which Nuvama said was in line with the Street’s expectations.

The share exchange ratio for the amalgamation of IDFC Limited with IDFC First Bank shall be 155 equity shares of face value of Rs 10 of IDFC First Bank for every 100 equity shares of face value of Rs 10 of IDFC Limited. This comes days after Housing Development Finance Corp Ltd merged with HDFC Bank in a $40-billion deal, the largest in India's corporate history.

The share swap ratio is in favour of target company (IDFC Ltd), Nuvama said adding that the swap ratio equates to 1.55 while Nuvama Alternative was building in 1.40 (worst case scenario) and 1.60 (best case scenario).

"The share exchange ratio for the amalgamation of IDFC into and with IDFC First Bank shall be 155 equity shares of IDFC FIRST Bank for every 100 shares of IDFC Limited. At today’s closing price the spread is in favour of 16.3 per cent for IDFC Ltd holders. We expect the spread to contract at Wednesday's opening itself, thus, 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 per cent, then it’s a good level to enter but that looks unlikely to happen," Pagaria said.

In a note, Pagaria said the merger completion should take anywhere around 12 to 15 months from now. He cited recent two BFSI merger instances where the merger formalities took 12-15 minutes to complete. The first was the HDFC Twins, which will get completed in 15 months. The second was the merger of Shriram Transport Finance Company and Shriram City Union Finance that got completed in 12 months.

The merger is expected to 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, IDFC First Bank said in a stock exchange filing.

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