Dr. Rajiv Lall of IDFC Bank is as blue chip as they come. He said five years back that IDFC Bank would be created. He stayed true to his word and got the license. In the meantime, he has also steered IDFC and built it into an institution known for its values and capabilities.
In a banking system facing capital adequacy issues, this bank will start off well capitalised and with stressed legacy loans from IDFC well provided for. Its starting book value will be INR 40 and starting balance sheet around INR 70,000 Crores.
His central proposition for the bank is - lowest cost to income in the sector and a new generation technology bank which will attack the urban and semi urban and rural markets with differentiated strategies around physical branches. It will start life as a wholesale bank and an online bank and spread out.
Both in terms of business quality and management quality this is an interesting proposition. They might rewrite the banking rules in what will eventually be the third largest banking system in the world after the US and China in a few years from now.
Some very simple calculations indicate that the bank might list around INR 60 ( BV of 40). The industry average of NP / Balance Sheet is around 1.5% for banks. Dr. Lal has said that by 2020 the banks balance sheet will be INR 2 Lakh crores. He has also said that theirs will be industry beating profitability given business model ( which I tend to believe ). Applying 1.75% on the balance sheet number, one gets a net profit of INR 3500 Crores. The Equity base is 338.9 crore 10 rupee shares. This works out to an EPS of INR 10.33. The heavy weights like HDFC Bank trade at X 25 earnings. Applying the 22 - 25 range gives a market price between INR 230 and INR 260 BY 2020; which is a 4x possibility.
Key risks are execution in this competitive industry, roadblocks in retail banking.
Overall, looks to be an interesting proposition