IDFC LTD AND IDFC BANK


IDFC Ltd

  1. The strategy of IDFC bank will be to leverage the corporate relationship in terms of liability business; asset build up and flow of non interest income. We are however not bullish on corporate business growth for the system due to week credit demand and declining working capital cycle. Hence the growth in corporate banking business would remain a key challenge.
  1. The building retail liability and asset is a long gestation business and would entail high operating expenses in the intermittent period. The focus initially would be urban metro centres.
  1. The agriculture / rural business initially would cater to the loan book requirement of the bank (owing to PSL commitment) only.
  1. IDFC has taken a proactive measure to provide Rs25bn for the potential loss in energy exposure. Post the write down, the total networth for IDFC Bank translates to Rs135bn with capital adequacy ratio of +15%. The Gross stress asset book is Rs88bn and outstanding provision (including one time write off from reserves) would amount to Rs51bn and balance net stress book amounting to Rs37bn. The networth of subsidiaries would work out to Rs24bn.
  1. The management is hoping to start IDFC Bank with a ROA of 1%. However there can be down side risk to the number given the drain on its NIMs (owing to regulatory burden) and PSL compliance. The ROE of the business would remain sub 10%, which we believe would continue to remain at the similar level in medium term given the fact that the entity would require fresh capital by FY18/FY19.

Valuation

IDFC Bank: Valuing at 2x FY17 Adjusted book value per share of Rs51 (adjusted net worth of Rs163bn divided by equity share of Rs31.87bn) , we arrive at a fair value per share of Rs102 (Rs327bn for the IDFC Bank as a whole). Providing a multiple over 2x to an entity without any liability franchisee would be unjustified (Even ICICI bank today trades at 1.5x FY17 ABV).

FY17e IDFC Bank
Net worth , Rs bn 163.4
paid up equity, Rs bn 31.9
adjusted book per shar value 51.2
multiple 2
value per share of IDFC Bank 102.5

IDFC Ltd: IDFC Ltd holding in IDFC Bank of 50% will be valued at Rs61 per share (The 50% business is valued after taking 20% holding company discount). Valuing the non banking business at 1.25x the adjusted book value per share of Rs15 works out to Rs20, thus taking the fair value of the entity at Rs81 per share for IDFC Ltd. We do not cover the stock and hence do not have a rating.

FY17e IDFC Ltd
total value of bank, Rs bn 327
IDFC Holding 50%
holding company discount 40%
value of IDFC Ltd holding in IDFC Bank, Rs bn 98.0
paid up equity, Rs bn 15.9
value per of Banking business (A) 61.49
Networth of non banking business, Rs bn 24
Multiple 1.25
total value of non banking subsidiary, Rs bn 30
per share value of non banking business (B) 18.8
Total value of IDFC Ltd per share (A+B) 80.32
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