Buy Federal Bank Ltd for the Target Rs. 250 by Prabhudas Lilladher Ltd
Blackstone invests 10% equity post-money
Board approved preferential issue of up to 272.97mn warrants at Rs227 p.s. to Asia II Topco XIII Pte. Ltd. i.e. Blackstone for Rs61.97bn. 25% of the amount i.e. Rs15.49bn would be payable at time of subscription post RBI and shareholder approval while remaining 75% will be payable within 18 months of allotment. This suggests a pre/post money dilution of 11.1%/10.0% at a valuation on Sep’27 ABV of 1.3x (normal 1.2x) indicating that the raise is BV accretive. CET-1 may increase by 200-250bps to 17.0-17.5%. Accretion to FY27/28 ABV would be 4.1/2.7% while ROE might fall by 11/63bps to 12.1%/11.9%; EPS for FY28 may be 7% lower. NIM for FY27/28E increases 2/3bps to 3.10/3.13%. Capital raise is a positive since it would strengthen the balance sheet and support growth. Also, it gives FB leeway to plan for an inorganic acquisition. Due to a stronger balance sheet and increase in ABV, we increase multiple slightly to 1.4x from 1.3x on Sep’27 ABV and raise TP to Rs250 from Rs235. Retain ‘BUY’.
? Contours of the transaction: Board has approved preferential issue of up to 272.97mn warrants each carrying a right to subscribe to 1 equity share (FV Rs2) at a price of Rs227 (hence premium of Rs225) to Asia II Topco XIII Pte. Ltd. i.e. Blackstone for cash consideration of Rs61.97bn. 25% of total amount i.e. Rs15.49bn would be payable at the time of subscription post RBI and shareholder approval while remaining 75% will be payable within 18 months of allotment. The warrants shall be convertible in one or more tranches. Subject to shareholder approval, the Board has approved the right to nominate 1 (one) retiring non-executive director on the Board upon exercise of all the warrants and subject to the investor holding at least 5% of capital.
? Raise at existing valuation of 1.3x; CET-1 at ~17.5% to match larger peers: Preferential issue is 272.97mn warrants while paid-up capital as at Sep’25 was 2,459mn shares. This suggests a pre/post money dilution of 11.1%/10.0%. Capital raise would strengthen the balance sheet; as at Sep’25, RWA was Rs2.2trn while including profits for H1FY26, CET-1 was ~15%. Total raise of Rs61.97bn may increase CET-1 by ~15% and shore up CET-1 ratio by 200- 250bps to 17.0-17.5%. This would make CET-1 comparable to peers like ICICIB (16.3%), HDFCB (17.5%) and AXSB (14.4%), CUB (22%) and KVB (17%).
? Capital raise positive for the bank: Prior to this week, normalized CMP was Rs210 suggesting valuation of 1.2x on Sep’27 ABV. Our FY27/28E ABV was Rs163/184 suggesting a pre-money valuation of 1.4/1.2x. Transaction price of Rs227 would translate to higher post-money valuation of 1.3x indicating that this raise would be BV accretive. On a post-money basis, assuming money is invested in 2 separate tranches i.e. 25% in Q1FY27 and 75% in H1FY28, accretion to FY27/28E ABV would be 4.1% and 2.7%. Due to capital raise, NIM for FY27/28E increases 2/3bps to 3.10/3.13%
? Share issue to support future balance sheet growth: FB is currently in a consolidation phase as targeted change in asset-liability mix is in progress. While increasing the CET-1 and strengthening the balance sheet, this capital raise would support the bank in the upcoming phase of growth. Also, it gives FB leeway to plan for an inorganic acquisition.
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SEBI Registration No. INH000000271
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