A win-win deal

HDFC Bank may have overpaid just a bit for Centurion, though it's a good deal.

The merger of Centurion Bank of Punjab(CBoP) with HDFC Bank is a win-win situation for both banks. Moreover, the merger ratio of 1:29 which implies a price of Rs 50.80 for CBoP, is not unfair to CBoP shareholders.

If the market expected more "�the stock was down 14 per cent in Monday's trade--it was being unreasonable. After all, HDFC Bank has one of the best spreads, at 4.5 per cent, and possibly the cleanest book in the industry; its return on equity has been a robust 18-20 per cent while for CBoP, it has been in the range of 10-12 per cent.

Indeed, CBoP's loan book is vulnerable to increases in non-performing assets, especially with regard to two-wheeler loans. HDFC Bank has a far higher proportion of cheaper current and savings accounts at an enviable 50 per cent plus compared with about half that level for CBoP.

So, by valuing CBoP at about 4 times FY09 price to book (very close to the valuation that HDFC Bank commands) HDFC Bank may have overpaid a little, even after taking into account an acquisition premium.

CBoP's valuations were stretched relative to its fundamentals, possibly because it has all along been viewed as a potential takeover candidate for a foreign bank.

Given that the central bank's policy on allowing foreign banks to pick up significant stakes in Indian banks is not really very clear, the promoters of CBoP could not have timed the merger better.

For HDFC,there will be a dilution of about 23 per cent, including the preferential allotment to the parent HDFC, but it is unlikely that the merger will be earnings dilutive beyond 2010.

However, what kind of write-offs need to be taken by HDFC Bank because of the merger remain to be seen. That's one reason perhaps why the stock came off by 3.5 per cent on Monday.

However, the deal is definitely value accretive because of the 20 per cent addition to the balance sheet and a 50 per cent increase to the branch network. At the current price of Rs 1,423 per cent, the stock trades at 4.3 times estimated FY09 adjusted book value( pre-merger) and should continue to outperform.

Reliance Power: Some consolation

After making small shareholders feel miserable, Reliance Power is attempting to appease them with a bonus issue in the ratio 3: 5. Since retail shareholders have bought the shares at Rs 430, the bonus brings down the cost to Rs 269 per share; for the others the cost comes down to Rs 281 per share.

After languishing at lower levels ever since the listing on February 11 and also for nearly half the day on Monday, the stock closed at Rs 450.40, posting a rise of 8 per cent. This is the first time that the R-Power stock has closed above Rs 450, the issue price for non-retail investors.

The average traded price before Monday has been about Rs 355 which means the market had already de-rated the stock. Given that the dilution in the stock is just about 6.1 per cent (because only non-promoter shareholders will receive bonus shares and more than 90 per cent of the equity is held by the promoters), the price should, in theory, adjust to about Rs 423 levels ex-bonus, assuming that the market price sustains at current levels.

If that happens, then shareholders will be well in the money because their cost of acquisition has come down. However, if one were to take the average trading price of Rs 355 till Monday, the stock should trade at Rs 334 levels ex-bonus.

In that case, the gains for shareholders will be smaller though they can exit at a profit. Analysts tracking the sector, however, believe that given the very long-term gestation period for power projects and the uncertainty with regard to the supply of fuel, particularly natural gas, the fair price for the stock is at far lower levels of between Rs 200-250.