Acquisition of

Mannapuram Finance by
Bajaj Finserv
Group 7
 DEAL THESIS

• VISION of Bajaj Finserv: To provide customers with high quality

products and services using group’s values of reliability, innovation
and efficiency.

• MISSION of Bajaj Finserv: to build a set of financial service

businesses that satisfies our customers.

• Bajaj Finserv is the largest NBFC holding company and its AUM is
1.29 lakh crore. Its sales comes mostly from urban areas. With Gold
loan AUM up by 10.5% yoy and Indian consumers demand for gold to
be stable, Manappuram finance is an ideal option for acquisition.

• Manappuram finance has 57% gold AUM from urban areas and Bajaj’s
expertise to cross sell products and services in urban areas will help
it in selling gold.
 Regulations
• Requires prior clearance from the Reserve Bank of India, failing
which shall result in adverse regulatory action by RBI, including
cancellation of the license of the NBFC
• According to an RBI notification in 2015, the prior written permission
of the RBI shall be required for:
– Any takeover or acquisition of control of an NBFC, by acquisition
of shares or otherwise;
– Any merger/amalgamation of NBFC with another entity or vice
versa that would give the acquirer/other entity control of the
NBFC;
– Any merger/amalgamation resulting in acquisition or transfer of
shareholding in excess of 10% paid up capital of NBFC;
• In the case of the RBI gives the prior approval
– should be notified via a public notice in one leading national and
one leading local newspaper at least 30 days prior to effecting
such sale or transfer.
– The notice should be inclusive of the following details - the
intention to sell or transfer ownership/ control, the particulars of
the transferee, the reasons for such sale or transfer of ownership/
control.
 Relative Valuation

P/E Valuation % Undervalued Actual Value Curr P/E P/B Valuation % Undervalued
Actual Value Curr P/B
MGFL IN Equity 76% 18.90x 10.76x MGFL IN Equity 130% 5.08x 2.21x
MUTH IN Equity 112% 24.66x 11.63x MUTH IN Equity 161% 6.42x 2.46x
SHTF IN Equity 35% 12.41x 9.19x SHTF IN Equity 120% 3.25x 1.48x
EDEL IN Equity -26% 9.38x 12.72x EDEL IN Equity -128% -0.47x 1.66x
MOFS IN Equity 20% 31.82x 26.43x MOFS IN Equity -55% 1.15x 2.56x

• Bajaj Finserv Management has indicated that they would like to diversify
and become market leaders in the new business. Hence, we chose the
following 5 peers due to following reasons:
• Manappuram and Muthoot are leaders in gold loans which is a steady
growth segment in India
• SHTF provides loans in Commercial vehicles mainly expanding Bajaj
Finserv reach in auto loans
• Edelweiss and Motilal Financial Services are mainly into broking and
investment business giving Bajaj Finserv opportunity to be leaders in this
high growth industry
• Based on P/E and P/B valuation, we choose Manappuram and Muthoot as
the top 2 companies to acquire.
 CAMEL Framework
C : Capital Adequacy Ratios AUM = 19,438 Cr Points for AUM = 29,138 Cr Points for
Manappuram Manappuram Muthoot Muthoot
Weight
Tier I + II Capital 24% 1 23.72% 2
1 0.1 Capital Adequacy Ratio
Risk Weighted Asset (RWA)

Total Outside Liability 3.38 4 2.13 3

2 0.05 Debt - Equity Ratio
Net Worth

Total Advances 0.87 3 0.93 4

3 0.05 Total Advances to Total Assets
Total Assets

A: Asset Quality

Net Non-Performing Assets 0.30% 1 0.34% 2

5 0.1 Net NPA to Net Advances
Net Advances

Gross NPA 0.50% 1 0.76% 3

6 0.1 Gross NPA to Net Advances
Net Advances

M: Management Efficiency

Total Expenditure 0.66 3 0.57 2

8 0.05 Total Expenditure to Total Income
Net Interest Income + Net Non-Interest Income

Total Income 0.20 2 0.18 3

10 0.05 Asset Turnover Ratio (ATR)
Total Assets

Total Income - Interest Income 0.04 5 0.26 3

11 0.05 Diversification Ratio
Total income

PAT 0.05 4 0.09 3

12 0.05 Profit per employee
Number of Employees
 CAMEL Framework

E: Earnings Quality

Net PAT 22.24% 2 27.67% 1

14 0.05 Net Profit Margin
Total Income

Return on Equity Net Income 20.54% 1 21.18% 1

15 0.05
(ROE) Average Shareholder Equity

Net Interest Margin Interest Income - Interest Expense 15.12% 3 16.65% 2

16 0.05
(NIM) Interest Earning Assets

Interest Income 97.47% 1 79.70% 2

18 0.05 Interest Income to Total Income
Total Income

L: Liquidity
Interest Expense 0.33 2 0.42 3
22 0.2 Interest Expended to Interest Earned
Interest Income

Manappuram Muthoot
CAMEL Rating 2.1 2.5

Lower CAMEL rating of Manappuram indicates that it is better than

Muthoot and also the fact that Manappuram finance has 57% gold AUM
from urban areas and Bajaj’s expertise to cross sell products and
services in urban areas will help it in selling gold.
 Deal Summary
•100% Cash deal – 44,291.74 INR Million in Value (44.3 INR Billion or
620.09 million USD)
•Timelines
1. Talks with Target – 1 week
2. Start of pre-merger negotiations – 1 month
1. Initial Offer sent after Bajaj Finserv Board approval
2. Setting up deadlines for due diligence
3. Due diligence team appointment
3. Due diligence phase – 6 month
1. Synergy Identification
2. Operational compatibility Deal Summary INR/ share P/E P/B
Current 122.30 11.13 2.33
3. Culture Fit Offered 145.08 13.20 2.76
4. Negotiation Phase – 3 month
1. Board Approvals
5. Announcement of Deal – 1 month
•Initial Offer Terms:
1. Offer Price – 145.08 INR / share for 36.44% stake (24.8% premium
over last price as on 13 Aug 2019)
2. Upfront Cash payment: 14,858.4 INR Million
 Due Diligence
Strong Financial Health in perceived future:
•A healthy overall RoE of 23.4% in FY21E suggests growing profits.
•The market for gold loan business is increasing. Average LTV for gold
loan is 62%.
•Remarkable performance in other business areas like Mannapuram
Asset Finance and Asirvad Finance(Insurance Broking Business).
Diversification into other business and hedging business risk:
•Average yield in microfinance is 21% whereas in gold loans it is 26%.
•MFI subsidiary Asirvad continued to be RoE accretive for the
consolidated business delivering an RoE of 25%.
Liability and liquidity exposure:
•Going forward, the company would be focusing on diversifying its
liability base. The company is in the process of raising money from retail
NCDs and foreign currency bonds. Overall, the company does not expect
any funding challenges to hamper its growth plans.
•In fact, the company has received funding from all routes. CPs have
been rolled over and banks and AMCs too are disbursing funds to the
company.
 Valuation
Ashwath Damodaran’s ‘Valuing Financial Service Firms’ paper from
2009 details a few methods for valuing financial services firms.
He highlights the fact that debt is ‘raw material’ for BFSI firms like
commodities are for manufaturing.
Based on his views, DDM and relative valuation (P/B and P/E) were
selected:

Dividend Discount Model: Relative Valuation: 13 firms

Beta: 1.26 P/B or P/E =
Rf: 6.49% Intercept +
Rp: 4.93% Cgrowth x proxy for growth +
1st stage: 5 years Crisk x proxy for risk
ROE(historical data): 19.45%
Stable growth period: Selected:
ROE: 20% P/B = I + Croe x ROE + Csigma x Std.
growth rate: 6.5% Dev. of price
Beta: 1 P/E = I + Ceps x EPS next 2 year
CAGR + Cbeta x Beta
 Deal Pricing

Present Value of dividends in high growth phase ₹ 9.57

Present Value of Terminal Price ₹ 147.44

DDM Value of the stock ₹ 157.02

Mannapuram Precedent
Price/Share Transaction Price point
As on 13 Aug 2019 Premiums
1 day price 122.3 42% 173.67
1 month avg 119.4 38% 164.77
1 week avg 118.99 40% 166.59
1 year avg 105.9 37% 145.08
1 year high 144.9 17% 168.95
90 day avg 126.26 38% 174.24

Undervaluation at
Undervaluation at Undervaluation at Undervaluation at
Method Price/Share Selected price
Min price point Avg price point Max price point
point

Broker estimates 149 3% 3% -10% -14%

DDM 157.02 8% 8% -5% -10%

P/B 271.929 87% 87% 64% 56%
P/E 207.79 43% 43% 26% 19%
 Benefits and Synergies
Avg Shareholder holding
1.65
Duration in years
Avg Shareholder Cost INR 69.43
Upside 108.97%
CAGR 56.40%
Holding by Avg cost basis Upside Duration CAGR % Held Sought
Nandakumar V P 24.96 481% 5 42.19% 28.9 23.9
Baring Private Equity Partners Gro 17.18 744% 8 30.56% 8.78 8.78
Barclays Merchant Bank Singapore L 96.12 51% 2 22.86% 3.76 3.76

Cross-selling Synergy 4205.78

Cost Synergy 3736.83

Net Synergy 7942.61

Marginal Tax Rate 33.58%

Tax on Synergy 2667.07

Total Synergy for 1 year 5275.55

Bajaj Finserv has customer base of 21.85 Mn and revenue of INR 185,020 Mn giving
realisation of INR 8,467 per customer. Manappuram has customer base of 4.3 Mn and
revenue of INR 41,163 Mn. giving realisation of INR 9,572 per customer.
Cost Synergy was calculated on Employee costs and Finance cost.
 Capital Adequacy

Bajaj Finserv Mannapuram Finance Merged Post Acquisition

T1 Capital 1,70,257.00 38,323.28 2,08,580.28 1,93,721.84
T2 Capital 45,874.70 625.85 46,500.55 48,430.46
RWA 10,46,063.80 1,64,697.73 12,10,761.53 12,10,761.53
T1 CRAR 16.28% 23.27% 17.23% 16.00%
T2 CRAR 4.39% 0.38% 3.84% 4.00%
Total CRAR 20.66% 23.65% 21.07% 20.00%

Upfront Cash payment has been decided based on fact that cash
outflows impact Equity Reserves which reduces Tier 1 CRAR (pegged
to 16%). Cash balance next FY must also be sufficient for other needs.
Similarly, Debt requirement has been structured to keep up T2 Capital
CRAR as 4% and overall CRAR to be 20%.