IDFC Bank - Thoughts?

(Sandokan) #65

Yes, I would agree. But being inherently cautious, I would prefer to watch at least the results of the next quarter, and look for positive and supporting signs in the BS. And it would be equally true to say that each person has his own strategy, but participating in discussions on VP has shown me a different perspective which has positively contributed to my learning process.

Thanks and regards

(neopandit) #66

That is very true. Discussions here are much more informative. I agree, IDFCBank is more of a leap of faith for me but then the arguments put forward - retail sector growth, focus on technology, hub and spoke model instead of costly branch network will keep the costs low. The way I see it most of the staff in other banks does things that can be done by machines on a 24x7 basis - like accepting cash, cheques, and service requests, giving cash and printing passbooks. The banks will go down due to the cost of maintaining branches, creating forms/stationary, and not to mention over pampered staff thanks to unions. Since it is not easy to fire employees in India, I would bet on a bank that would keep these costs under wraps from the very start. That along with valuations and post merger promise sums up my investment rational. BTW, Vaidya had said bank will take 2-3 years for significant gains to shareholders so your estimate of 3-4 years is perfect. I am ready to wait for that long, so it works for me perfectly. regards,

(vaibhav) #67

About the management quality - when Mr. V Vaidyanathan was asked to grow the retail business at ICICI Bank, he had all of 50 employees in his division. By the time he left it after nine years, it had more than 26,000 employees at 1,500 branches in India. With his own stake in IDFCB, and age on his side, I do not doubt his leadership.

(Investor_No_1) #68

I admire Vaidyanathan a lot and thats the sole reason for me buying IDFC bank (small holding at moment). Has he started operations already or post merger he will operate as CEO of IDFC bank? Is he calling the shots already?
Also, with Capital first, the loan book will have retail component but how will they increase CASA needs to be seen…Capital first will not help them get deposits…or will it?

(vaibhav) #69

Mr Vaidya will open 200+ branches in 1st year itself taking idfc+capital first branches to 450.

I have observed yes bank,indusind bank from 8 years back, and iirc they had 250 branches, 5-10% casa and have been opening abt 100 branches per year and maintaining good RoE. I have infact owned YB stock with good gains. (Now YB has 35% and indusind 40% casa and 1000+ branches. ) Although idfc bank’s RoE will be low ( not even double digit RoE) for first 2 years.

(neopandit) #70

Here is a link to an investopedia article comparing the Online banks with traditional banks. I hope IDFCBank will sit right in between the two. Regards,

(neopandit) #71

Vaidyanathan will take over only after the merger. As for calling the shots, I believe part of the deal is that there will be no unpleasant surprises when Vaidya takes over the merged entity. So, lot of provisioning etc is forced on to the current management. Basically we do not have to worry about a lot of dirt-under-the-carpet coming out at first result after change of guard the way we see with a public sector bank. Then there are several actions that current management has to perform for the regulator - like IDFC is buying IDFCBank shares from the open market so that its share in the merged entity is at least 40% at the time of merger. They have almost finished that purchase.
CAPF will not help with deposits directly. But they will bring lots of customers and a bank a/c with IDFCBank can be opened by the CAPF customers for ease of transactions. So, there can be indirect impact. Whatever biz CAPF generates will now have a lot less cost of funds - about 200-300 basis points as per Dr. Lall if I remember correctly which will be very profitable for the CAPF biz in the merged entity. regards,

(neopandit) #72

IDFC increases its stake in IDFCBank
Total stake increased from 52.80 to 55.15 These 8.5 Crore shares were bought at an average price of 41.20 with min price of 36.82 and max price of 44.18 Another 0.7% shares need to be purchase to ensure a 40% stake in merged entity as per my calculations. regards

(neopandit) #73

IDFC Bank net profit down 58% to Rs 181cr in Q1

  • I can not come to any definite conclusion from the results myself. QoQ the result looks good due to less provisioning and YoY the results look bad due to less other income.

  • The other income has dropped some 450Cr YoY of which 283Cr was profit from treasury sells last year. So, still a shortfall in actual fee income. This 450Cr is balanced out partially by rise in Interest Income and some tax refunds/write backs. About 35Cr rise in employee cost and 15Cr rise in other operating expenses which is understood as retail segment expands. So a shortfall of 256Cr in PAT.

  • What to make out of it? PAT is less - that is literally the bottom line. But it is not less because of some stinky issues. Is that compensation enough for the investors?

Anyway, one more quarter close to the merger. Hope it brings clarity, sense of direction, focus in actual business matters. Currently the wholesale book is coming down fast enough but retail book is not growing that fast (I agree, it can not). So, what is lost in wholesale biz, Treasury investments/ income is not being replenished by retail segment. The retail biz is still a cost center. Merger would help swell that number to better balance off the shrinking wholesale biz.

The wait continues. Regards,

(neopandit) #74

IDFCBank has uploaded Q1 FY19 results as Investor presentation . Con call is tomorrow (August 1) 11 a.m. Regards,

(Mahendra.jain) #75

Any takeaway from today’s concall? Had missed it

(vaibhav) #76

Of course there’s a LOT which could go otherwise and would require constant analysis by the investors, but if things go as my per expectations/hopes, My Price target for 5 months to 1 year is 80 (2x). Fy20 ends with 450-500 branches and full year roe of 5-6% (i know these internal targets from relevant sources).

My Price target for 5 years 200 (5x)…BV 60-65, roe 15%…at this point equity dilutions via qips start to happen.

My Price target for 10 years 15x-20x.

V Vaidyanathans Interview from yesterday -

Disclosure : invested in capf. Views are biased. I am not a financial advisor.

(mohammadarshad27) #77

I have a doubt regarding the equity of IDFC bank. The merge entity would held about 470 crore of equity and approx 4700 crore shares…can IDFC bank share price would have a high growth with this high equity…will they be able to give good dividend in future.i seriously doubt it getting 20 times in ten years with this high equity

(pkk123) #78

I find your targets highly optimistic. First of all, for an RoE of 15%, ICICI Bank is being valued at 2 times FY20 BV. They also have retail assets above 50% now. IDFC-CAPF would have BV per share around Rs 40 and ROE in single digits so why would this be rated at 2X for TP of 80? 5 years later, with RoE of 15%, it can get a multiple of 2 times which means TP of 120-130 but there again, why would IDFC get rated at 3 times book for your TP of 200? Finally, combined entity has an MCap of 20,000 Cr today. 15-20x in 20 years would mean an MCap of 3 to 4 lakh Crores. ICICI bank has an MCap of 2 lakh crore today. Can IDFC do so well beating all the other good and established banks around?

Disc. Trying to understand and decide between buying ICICI and IDFC.

(vaibhav) #79

Icici’s long term RoE is 11% not 15%, slightly higher than federal bank’s. From single digit RoE at CapF , mr vaidyanathan has demonstrated clocking 15%+ RoE (annualized from q4 fy18) . He has demonstrated the same by growing retail business at icici. You could look at CapF reviews by ~500 customers at or capital first android app reviews by ~18500 people at the playstore. Also, 3-4 lac crore 10 years in future is close 1.75-2.25 lac crore today. A random example dug up for you, do you know hdfc banks market cap (adjusted for the equity dilutions) 5-6 years back was close to today’s market cap of indusind bank?

(pkk123) #80

Thanks for replying. When IDFC Bank was carved out from IDFC, Rajiv Lall had said that they have taken all the hit upfront and things will improve here on. This quarter he is again talking of 1000 Cr provision and that a clean bank will be handed over to Mr. Viidyanathan. Its IDFC’s legacy book (and bloated equity) which is the concern for me not the ability of Vaidyanathan. The combined entity can flourish only if IDFC plays its part of building retail liability which they have failed to do so far. In the absence of cheap CASA deposits, what is there to gain for CAPF from this merger? In effect they are only getting a banking licence which comes with a baggage of tons of legacy issues. I hope Vaidya can make wholesale changes and make the combined entity work but at this moment, I see a lot of uncertainties. A positive is optically cheap valuations. There is (hopefully) not much downside from here.

(vignesh) #81

When the de merger happened their book is 100 % Infra. Now its a bit diversified with about 12 % in retail and 35 % in corporate. In the CASA segment they have 11 % of the total deposit. While this is not enough YoY they are growing at 100 % and with the merger they will become a diversified book with 40 % advances in retail and 1 Lakh cr in total Advances. And Hopefully by cross selling they should be able to address the liability side as well in the next 3 - 5 years.

(pkk123) #82

Thanks for the reply. Now my question is that if IDFC will take 3-5 years to go where ICICI currently is, isn’t ICICI a better bet for the medium term? Or is there something obvious I am missing?

(neopandit) #83
  1. Merged entity will have a total of 478,05,36,599 shares ( 340,41,11,422 of IDFCBank at present PLUS 137,64,25,177 new shares to compensate for 9,90,23,394 of CAPF shares). That is 478 Crore shares and not 4700 crore shares. Please correct me if I am missing something here.

  2. Leaving aside any synergies for both the companies (higher retail book IDFCBank and lower cost of funds for CAPF) let us assume they deliver the same EPS as Q1 FY1819. So the EPS for the merged entity will be = (Earnings of IDFCBank + Earnings of CAPF) / 478 Crore shares = (181.55 + 89.10) / 478 = 0.566 compared to the current EPS of 5.53 for IDFCBank today. The acquisition is EPS accretive. So, the Bank shareholders are well compensated for the dilution in equity and the increased equity is not an issue.

  3. Assuming no growth for next 3 quarters, the PE for IDFCBank currently is 41.8/(0.53*4) = 19.39 Post merger it will be a much bigger bank than present but not big enough to be saturated. Post merger the pecking order in Private sector banks as per Bloomberg (stale data) will be HDFCBank, ICICIBank, Axis, Kotak, Yes, IndusInd, IDFCBank, and RBL Bank. If we see the PE of all other banks then they are 30.82, 42.57, 52.6, 59.48, 19(Yes), 31.81, 19.39 , 35.06 !! So, as long as we are not doubting the quality of management to perform with these peers, we can be sure of a PE re-rating for the IDFCBank.

  4. Share price being the combo of earnings (the present hard numbers/ results) and the growth potential (market perception as expressed in p/e multiple) we can see that there is a good chance that the merged entity is placed to benefit on both the parameters.

  5. 5x in 5 years will mean a CAGR of 38% at constant PE. In the initial years if we assume a doubling of PE in line with the rest of the pack (Except Yes) then the requirement is 20% CAGR. I believe this is achievable for a private sector bank where GDP is rowing at 7% and inflation is growing at 4% p.a… So, I can imagine 5x in 5 years.

  6. 20x in 10 years is more or less the same 35% CAGR at same PE and 26% CAGR at twice the current PE. However, in 10 years the bank will be much bigger and the growth will plateau. So, I can not assume double the current PE at that time. But still it would be a pretty impressive performer.

Please double check my calculations.
Of course, I am invested in both IDFCBank and CAPF.

(mohammadarshad27) #84

I mean to say 478 shares of face value 10. At some point of time it may split…and also if they don’t split it will be hard to issue any bonus…and same goes with dividend too…now if it gets 20* in 10 years than its market cap would be bigger than many of the banks at present…it would have mare than 350000 crore of marketcap…are you sure looking at all the NBFC ,banks available for competition .it can get that big in only 10 years

Vaidyanathan is great…capf is a great entity…and they can grow reasonably …may be 5 to 8 times in 10 years may be 10 times …but 20 times looks doubtful…looking at present marketcap and equity and branch network

I still it be a compounding machine for long term with 15 percent p.a but can not become an overnight multibagger