HDFC Bank and CBOP Merger: Long-term Positive For Both, Current Price Of CBOP Reflects Takeover Premium

HDFC Bank and CBOP boards have given an in-principle approval for merger between the two banks. The merger between the two banks would be long-term positive for both the banks. At current market price, merger appears to be more beneficial to CBOP’s shareholders than HDFC Bank.

HDFC Bank and CBOP boards met on Saturday, 23 February 2008, and have given an inprinciple approval for a merger between the two banks. We believe a merger between the two banks would be long-term positive for both the banks. At current price (Rs. 56 for CBOP and Rs. 1,475 for HDFC Bank), the merger would be more in favour of CBOP’s shareholders than HDFC Bank, given CBOP’s stretched valuation v/s its fundamentals. CBOP’s current price already reflects a takeover premium and we therefore believe that HDFC Bank should not be merging this bank at higher than the current price (25% premium to our fair value estimate). At current price the merger ratio will be one share of HDFC Bank for 28 shares of CBOP.

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Valuation And Valuation Techniques

Valuation of a company is to determine the value of a company at a price. To an investor, who is not a trader, a company should generate returns that not only keep it in business but also generate returns for their investments. Amidst all fluctuations and volatility any stock will finally stabilize at its fundamental value. Valuation can be classified into two categories: Relative Valuation and Absolute Valuation using the Discounted Cash Flow (DCF).

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Investors should have a Long-Term Horizon

While one continues to remain optimistic about the prospects of Indian Companies, one should believe that the re-rating of Indian equities over the last 3 years had led Nifty P/E to go from about 12 in 2003 to over 21 now. This level of P/E when compared with the historic average of about 17 is a result of large arrears from the past and partly an advance from the future. This gives a reason for one to participate in equity in a measured manner for incremental investments.

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Lessons To Be Learnt From The Recent Correction

The recent correction in stock market gives investors a good opportunity to re-assess their expectations from their investment portfolios and also their tolerance to risk. When markets are in a bull run, investors are rarely aware of the risk they are exposing themselves to. But it becomes all too apparent when the market corrects. The apparent problems, which an investor can face, can be:

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Market Timing Or Time In The Market

It is not timing the market, but, time in the market that matters. No one is perfect to time the market to perfection but if one spends sufficient time in market after investments then success is more or less assured. There is no record for investors who have a cent percent success ratio in timing the market, it can happen to anyone once or twice by sheer luck but there are billions of investors who have made wealth by being remaining invested in the market.

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Introducing The Indian Indices- BSE Sensex and the S&P CNX Nifty

The BSE is the Stock exchange that pioneered the stock broking activity in India in 1875. The stock market through its life since inception has seen a lot of ups and downs, but till 1986, there was no measure to quantify these ups or downs. This is when the BSE Sensex was compiled in 1986. Trading on the NSE began in 1994. In 1998, NSE and CRISIL formed a JV named India Index Services & Products Ltd. (IISL), which was formed with the objective of concentrating on the formation and maintenance of only indices as a product of this JV. This is when the CNX Nifty was launched, where CNX stands for CRISIL NSE Indices. This index is owned by IISL. Later on Standard & Poor’s, which owns the S&P 500 Index endorsed the CNX Nifty and then it begun to be called as the S&P CNX Nifty.

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