Shares of Equitas Small Finance Bank, Equitas Holdings, Ujjivan Small Finance Bank and Ujjivan Financial Services surged sharply on Monday after the Reserve Bank of India (RBI) allowed small finance banks (SFBs) and their holding companies to apply for the amalgamation scheme.
Shares of Equitas Holdings and Ujjivan Financial Services jumped the maximum 20 per cent on Monday while those of the other SFBs also rose but could not sustain the early gains. Shares of Ujjivan SFB closed at ₹30.95, recording a gain of 1.48 per cent over the previous day’s close after rising 10.8 per cent to ₹33.80 intra-day. Similarly, Equitas SFB, which jumped to a high of ₹76.75 in intra-day trade, closed at ₹69.50, up 6.76 per cent.
According to analysts, the RBI’s move allowing Equitas Small Finance Bank and Ujjivan Small Finance Bank to apply for merger of their holding companies with themselves is positive for the holding companies.
Discount to narrow
The amalgamation scheme will unlock significant value for shareholders of the holding companies as the hold company discount narrows. However, the fair value for investors would depend on the swap ratio, which will be the key to monitor, said Motilal Oswal Financial Services.
On Saturday, Equitas Small Finance Bank said it would seek the RBI’s approval for amalgamation with Equitas Holdings, while Ujjivan Small Finance Bank said it would initiate steps for the amalgamation of the holding company, Ujjivan Financial Services, with itself.
According to the RBI norms, small finance banks need to dilute promoter-holding to 40 per cent within five years of commencement of business.
“Equitas Holdings currently holds 82 per cent in Equitas SFB and the initial promoter lock-in of five years expires on September 4, 2021. Ujjivan Financial Services holds 83.3 per cent in Ujjivan SFB and the initial promoter lock-in expires on January 31, 2022,” said JM Financial.
Reverse merger
According to the Scheme of Amalgamation, Equitas Holdings and Ujjivan Financial Services are expected to reverse-merge with Equitas SFB and Ujjivan SFB, respectively, and current shareholders of the holding companies will receive the shares of their respective small finance banks, thus effectively leading to the exit of the promoter of the bank, it added
Currently, Equitas Holdings and Ujjivan Financial Services are trading at a discount of 35 per cent and 43 per cent to their fair value, respectively. For Equitas Holdings, the trading discount since listing has been in the range of 24-54 per cent, while for Ujjivan Financial Services, the holding discount has been around 33-57 per cent, said Motilal Oswal.
JM Financial said it believes this to be a positive development for the small finance banks as well as their holding companies.
At the current market price, zero holding company discount implies an upside of 55 per cent and 77 per cent. respectively, for Equitas Holdings and Ujjivan Financial Services. “We maintain ‘Buy’ rating on Equitas SFB and Ujjivan SFB with a target price of ₹75 and ₹48, respectively,” it said.