Merger derails 7-year breakout in IDFC First Bank shares. What should traders do?
A day after the merger was announced, shares of IDFC First Bank ended 4% lower at Rs 78.65 on Tuesday. A hot favourite of retail investors, the stock has rallied 23% in the last 3 months with bulls eyeing the Rs 100 mark.
After hitting a closing high of Rs 81.20 back on 28 September 2016, IDFC First Bank stock has been consolidating and broke out of its previous peak on 20 June when it closed at Rs 82.84.
Under the proposed merger scheme, approved by the two companies, IDFC shareholders will get 155 shares of IDFC First Bank for every 100 shares they hold. The share swap ratio is in favour of IDFC which translates into an arbitrage of around 9.6% on Tuesday’s closing price.
“Investors with a 12-18 months horizon can buy IDFC shares as the discount will eventually narrow down. However, investors must note that the merger is subject to regulatory approvals and the merger process may take at least 9 months or even longer time up to 18 months on the higher side. Thus, one must keep this in mind before buying the stock for arbitrage opportunities,” said Apurva Sheth of SAMCO Securities.
Nuvama’s Abhilash Pagaria suggests that if the spread is available at 13- 14%, then it’s a good level to enter but that looks unlikely to happen.
Fundamentally, analysts see the merger, done on the lines of parent HDFC with HDFC Bank, as a healthy development for the entities as well as the Indian banking system.
“IDFC Bank has been constrained by its high cost borrowing and this high cost-income ratio has been weighing on profitability. But during the last one year the cost-income ratio has been steadily coming down and the GNPAs and NNPAs also have been showing a declining trend. Deposit growth also is impressive. The merger can accelerate this trend and make the bank stronger,” said Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
On the technical charts, both the stocks look well-poised but IDFC stands out.
“On the weekly chart, IDFC had started walking the band last month. There was an attempt at a correction around Rs 109, which quickly got negated and the uptrend continued sharply. Even at this stage when price is seeing a little bit of profit booking, one can see a nice buy level around Rs 105. This level is also coinciding with its 20-day exponential moving average and has also given a new high,” said Rahul K Ghose, Founder & CEO, Hedged.
He suggests traders to initiate long in IDFC with a stop loss at Rs 94 and look for higher targets as the upward trending channel on the monthly charts is still intact.
(Data inputs: Ritesh Presswala)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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