Good Morning Toasters!

In today’s issue of the Morning Toast, we discuss:

• Axis Bank acquires Citi India’s consumer banking unit
• Elon’s up to no good
• News around the world
• An educational concept to keep you learning every day 🙂

Market Watch

Nifty: 17,498.25 | +172.95 (+1.00%)
FII Net Bought: INR 1,357.47 crore

Sensex: 58,683.99 | +740.34 (+1.28%)
DII Net Bought: INR 1,216.00 crore

Company News

Axis Bank acquires Citi India’s consumer banking unit; what’s up and what do you need to know?

The Deal

• Axis Bank has announced the acquisition of Citi India’s consumer banking assets in all cash deal for a total sum consideration of USD 1.6 Bn (INR 123 Bn), including
  • Mortgages (INR 100 Bn) + Cards Business (INR 89 Bn) + other retail loan products (INR 85 Bn)
  • Deposits (INR 502 Bn)
  • Wealth Management Business
  • Small Banking Business + Citi FinCorp (NBFC)
• The total valuation is lower in comparison to #’s reported in media articles, which pegged the deal closer to USD 2-2.5 Bn; Axis Bank has reportedly beaten heavyweight Kotak to this acquisition, who was looking to beef up their Cards business as well
• At USD 1.6 Bn (ex of integration cost), values the acquisition at 18.7x normalised CY20 financials, with rough estimates suggesting an implied Price / Book Value of 3.2x (CY 20), which are mean market multiples for a profitable/top of the value chain retail business

The Implications

• Axis Bank’s customer base will likely increase by 31%, while CASA / Deposit Base will increase 7% / 12% and advances book by 4%; as a part of the deal, the Bank will also acquire 7 offices, 21 Branches, 499 ATMs, and make an offer to ~3600 Citi employees to join Axis Bank
• Apart from a high margin book, Citi was an initial market creator of the Cards Business in the Indian space and mainly acquired High Net Worth Individuals (HNIs) + High Value Corporate Salary Accounts, which should bode well for Axis and allow them to sweat the liability/asset relationship and cross-sell effectively
• Axis Bank’s Cards in force (CIF) market share will increase from 12% to 15.6% due to an addition of 2.5 Mn cards; their spending share will jump from 8.5% to 13.1% (Citi average spend is ~1.8x vs Axis <1x)
• Axis Bank’s CET 1 ratio will reduce by 2.3% to 13%, due to Goodwill and higher capital charges on retail assets; while CET 1 will be above regulatory requirements, given most private bank’s stance on maintaining a certain threshold, the Bank may look to fund-raise in the near term to shore up that #

The View

• Axis Bank’s Cards business was a general laggard (in comparison to successful peers including HDFC, ICICI) and this acquisition, of a profitable, highly effective and early mover competitor allows the Bank to add a definite edge to their current business set-up
• That being said, Citi has lost its focus for a while, with declining market share and limited product innovation, which is indicative in the valuation ascribed; Axis will likely need to spend, innovate & motivate troops to get the ball rolling again (we believe), rather than just continuing operations as-is
• On an overall basis, the acquisition will likely pay for itself in the medium to long term, and should be Margin / RoA accretive for the Bank, provided prudent risk management is followed in new customer acquisition (Axis suffered last year and had to clean up its CIF book due to delinquencies)

Around the World 🌎

• Investor activism at its finest – Carl Icahn, one of the most famous activist investors, is demanding two seats at Kroger Co. to remedy major problems wrt their pork supply chain and the widening pay gap between workers and executives (CEO Mullen earned $22 million annually while the median employee salary was $24,617). In their defense, Kroger said that it has raised employee wages by 25% over the past 4 years and is not directly involved in the raising or processing of any animals. Icahn has in the past also launched a proxy fight for two board seats at McDonald’s over similar issues
• Point for crypto-skeptics – In the second-largest crypto hack ever, Axie Infinity, one of the most popular games saw hackers steal more than $500 million in cryptocurrency (173,600 ether & 25.5 million of the stablecoin USDC) by infiltrating its Ronin network which the game runs on. The incident is being credited to social engineering, and not a technical flaw although the decentralized nature and inexperience of developers have made crypto code vulnerable in the past. (ex. The 2016 break-in of Bitfinex saw  a loss of $70 million in bitcoin worth $3.6 bn today)

Tech News

Elon’s up to no good (or so it seems!)

• Tesla, for the second time in two years, is looking for a stock split and will be asking shareholders for approval in its fall AGM
• Often seen as signs of confidence of the management and increased reach to investors, the announcement saw Tesla shares climb 8% to $1091.8 on Monday
• This gain is also a relief as tech stocks are facing a tough battle with the Fed increasing interest rates (Tesla shares were down 4.4% in 2022 before the Monday rally)
• Stock splits seem to be the flavour of the season with 2022 seeing both Alphabet and Amazon propose 20-for-1 stock splits

Musk seems to be occupied elsewhere

• In a tweet that criticised Twitter, Musk said that he was “giving serious thought”  to creating a new social media platform of his own
• His tweets have landed him in some hot water in 2018 when the SEC accused him of falsely asserting that he had secured funding to take Tesla private
• Musk is now fighting a harassment lawsuit with the SEC that he filed after the latter accused him and his brother of violating insider trading rules
• Musk has built a bit of a reputation of not backing down in court (as seen also by lawsuits filed in ‘19, ‘20 and ‘21) and this time is turning out to be no exception either!

What else caught our eye? 👀

PSU privatisation en route

• The GoI is planning to raise Rs. 3000 Cr through an OFS of 1.5% (94,352,094 equity shares) in Oil and Natural Gas Corporation (ONGC)
• The floor price is set at Rs. 159 along with a 0.75% Green Shoe option and an invitation to bid for retail investors will be opened on Thursday
• FY22 saw a divestment target of Rs. 78000 Cr (mainly counting on the great LIC IPO) but has only seen ~ 12k crore being raised so far

India needs some coal, and it needs it now

• The GoI has cut off coal supply to non-power sectors like an aluminium smelter and steel mills (by 18.3% MoM) due to a sharp decline in inventories
• Plans to conduct three coal auctions over the next three months have also been put on hold and will likely be replaced by one auction for the entire quarter
• Accounting for nearly three-fourths of India’s power generation, the last coal shortage saw power cuts lasting up to 14 hours in some states

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Educational Topic of the day

FPO (Follow on Public Offer)

FPO (Follow on Public Offer) is a process by which a company, which is already listed on an exchange, issues new shares to the investors or the existing shareholders, usually the promoters. FPO is used by companies to diversify their equity base.