M&M plans to buy up to 10% stake in RBL Bank

The Mahindra & Mahindra group surely has a penchant for picking up companies under stress. In the past, it has made some very bold purchases like Punjab Tractors, SsangYong Motors of Korea, and Kinetic Motors from the Firodia family. However, the most ambitious of their deals was the takeover of Satyam Computers, after the company folded up, and its successful integration into Tech Mahindra.

In its latest move, M&M plans to buy up to 9.9% stake in RBL Bank. It may be recollected that RBL Bank was under a cloud a couple of years back due to its asset quality and its exposure to select business groups. That had also led to the stepping down of Vishwavir Ahuja from the CEO job. However, in the last couple of years, the performance of RBL Bank has improved as has its stock price performance.

M&M has already picked up 3.53% stake in RBL Bank

Just about a week back, M&M had already picked up a 3.53% stake in RBL Bank for a consideration of ₹417 crore. That approximately values the company at ₹12,000 crore. However, for a larger chunk, it may have to pay a premium, which is evident from the rise in the price of RBL Bank in the last few days. With a 3.53% stake in its pocket, M&M is targeting to take its stake to as high as 9.9%. Remember, Indian companies are not allowed to own more than 10% in any scheduled bank regulated by the RBI. Hence, to be on the safer side, M&M will restrict itself to 9.9% at the maximum.

In the past, large industrial groups have not had a very successful experience applying for a banking license. The RBI has generally been averse to giving a banking license to large business groups due to the conflict of interest that it can generate. However, it is clear that the M&M group is betting on the RBI relaxing some of its norms for offering banking license to industrial houses in the future. At that time, a bank like RBL Bank with an existing banking license will be a natural fit for a large business group like M&M. There are several global institutions like Baring Private Equity and CDC holding substantial stakes and M&M could look at one of them for a bulk sale of stake subject to RBI approvals.

What could be the logic for the stake buy?

Clearly M&M is looking at something beyond a mere portfolio investment as it already has a fairly large NBFC business housed under M&M Financial Services Ltd. The eventual plan may be to merge M&M Financial Services with a bank, wherein the benefits from the synergies, are likely to seep through. This is somewhat similar to what IDFC and First Bank have done in the past. RBL Bank has a network of over 520 branches and it plans to open another 80 branches in the current fiscal year.

It has recovered from the setback about 2 years back and that is showing in the financial performance and the price performance of RBL Bank Ltd in recent times. That would not only give the M&M group access to low cost deposits but also help them to leverage the branch network as the NBFC and the banking business merge in the long run.

How the stocks of M&M and RBL Bank have performed?

There are several interesting parameters for comparison. Here is a quick review of M&M versus RBL Bank, although it may look like comparing cheese and chalk.

• Mahindra has a market cap of ₹180,385 crore while RBL Bank has a market cap of about ₹14.797 crore, even after a frenetic rally. In terms of market value, M&M is more than 12 times the size of RBL Bank.
• In the last quarter reported, M&M had reported net profits of ₹1,549 crore while RBL Bank reported net profits of ₹288 crore. However, RBL Bank scores higher on the net margins at 10.75% compared to 6.86% for Mahindra & Mahindra.
• In terms of stock price moves, both M&M and RBL Bank are trading close to their 52-week high levels. However, RBL Bank has been much more volatile in the last on year. In fact, if you look at the price of RBL Bank since 2019, it lost close to 90% from the peaks before stabilizing and bouncing back more than 200% from the lows.
   
• In terms of P/E ratio, M&M trades at a P/E ratio of 29.1X while RBL Bank trades at 14.8X even after this rally. However, M&M has ROE of 16.04% while RBL Bank ROE is just about 7%. That probably justifies the higher pricing for M&M.

For M&M, this looks more like a bet on the long term that the RBI would be more liberal on the granting of banking licenses. After all, the earlier attempt of M&M to get a banking license in 2013 had not been accepted.

Why the markets are skeptical for M&M stake buy?

Skepticism is nothing new to Anand Mahindra. During the Satyam deal, most analysts had been unsure of the deal, but the Mahindra group did make it work quite well. However, there would be more practical challenges in a long term bet on RBL Bank. RBL Bank is still earning a lot of its money from the credit cards and the microfinance business. While corporate banking is still doing reasonably well, RBL Bank has been struggling on the retail banking business, which is where the spreads are the maximum.

The new chief of M&M, Anish Shah, has a strong focus on capital allocation and ROE. The target is to boost the ROE to above 18% by this year and RBL Bank may not fit into that kind of a plan. M&M has also been aggressive in cutting down its non-productive businesses to boost the ROE of the group. To boost its ROE, the RBL Bank may need a much bigger focus on retail banking. That is a game for the long haul with the PSUs and the large private banks already dominating that space.

As per extant guidelines, promoters can own up to 26% in an RBI regulated bank, but that benefit has not been extended to corporate business houses. So, the limit for them continues to be 10%. It remains to be seen how M&M is able to make long term sense out of a bigger stake in RBL Bank. For now, it is just a small 3.53% stake. It remains to be seen how M&M plans to scale up its interest in RBL Bank.