I am surprised to find no discussion in almost 3 months for this thread.
L&T mutual fund pending transaction could indicate good benchmark for valuation of IDFC AMC. Current market price of IDFC seems to indicate huge discount for holdings of IDFC First Bank + AMC holding.
This specifically mentions
āTo study the current regulations on holding of financial subsidiaries through nonoperative financial holding company (NOFHC) and suggest the manner of migrating all banks to a uniform regulation in the matter, including providing a transition pathā
Explicit mention of transition path and stated intention of migrating all banks to a uniform regulation is definitely plus for IDFC. Current regulation put different requirements for holding companies such ICICI group or HDFC compared to IDFC. New regulation is likely to allow more efficient structure for IDFC with possibility of collapsing NOFHC and/or AMC into bank. This will be huge positive for IDFC to unlock value. Potentially helping GOI which has sizable ownership.
Committee recommendations are expected on Sept 30. It might get delayed but it is definitely moving in better direction for IDFC but doesnāt seem to be priced in.
Issue with IDFC is that we as investors have to wait and watch how much IDFC bankās book value gets eroded.
As a conservative base case I am expecting the book value to erode from 17500 Cr at present to 10,000Cr once covid is done.
Given this scenario, I donāt think the market can give IDFC a much higher value.
@Rushil, do you expect bank to post credit losses worth 7500 Cr? That seems excessive.
Retail portfolio is currently around 56K Cr + 5K Cr purchases. Historically this has performed with 2-3% GNPA. Accounting for some security bank might have, NNPA from this portfolio would be around 2% which would be around 1200 Cr.
To arrive at above number, whole portfolio will need 6300 Cr losses on portfolio of 41K Cr. That seems very excessive estimate.
I would guess stress of about 8-10% in this portfolio as a worst case with 25% recovery which will lead to GNPA of 4000 Cr and recovery of 1000 Cr so net losses could be around 3000 Cr.
Total losses of 4200 Cr will be bad for the bank and very likely to lead to hit to CRAR but even this worst case assumptions are well below 7500 Cr estimates.
For the retail portfolio of 61k crore conservatively (this is a calculation for margin of safety in investment) about 5 to 10% NPAs I am expecting since the bank lends to weaker sections and also the huge moratorium percentage we can see.
Similarly for the wholesale side.
Overall 7.5 % or so of the book to be losses given the moratorium size.
Losses would be coming from both retail and wholesale loan portfolio and based on results and data so far higher NPA formation in wholesale portfolio.
Also even after loans worth 5000 Cr turn into NPA, bankās loss will not be 100% of the loan as some loans have security against them. This is reflected in different expected losses expected within categories of loan such as home loan, LAP, unsecured personal loans, project finance and NBFC finance.
The trigger is that this was heavily oversold and way below its potential value and as IDFC Bank moves up this has outperformed,expect that they can do some monetization of their stake in the bank after Dec 15,2020 as the preferential allotment will have completed 6 months by then.
RBI report is awaited on September 30ā¦it may or may not provide clarity on the merger,regardless of that IDFC is no longer obligated to hold 40% after Oct 2020 but since they did preferential issue in June 2020 they will be able to monetize after six months only as their shares will be locked in for six months after the allotment,that is sometime after Dec 12, 2020 when they will be able to unlock 25% holding in the bank.
Since I first posted on this thread, the stock has moved from 19.3 on August 4th to 29.55 today.
Looking at valuation floated for L&T mutual fund and UTI AMC upcoming IPO, conservative valuation for IDFC MF could be in the range of 4000-5000 cr.
On June 12, 800 cr investment made by IDFC into IDFC First Bank, when market cap of IDFC was 2900 cr. Today that investment is worth 1160 cr. Entire IDFC First bank stake is worth 7635 cr.
I believe best case scenario after RBI announcement could be simplification of structure of IDFC which will allow to spin off of entire IDFC First Bank stake similar to initial share allotment during listing of IDFC First Bank. Remaining IDFC could be just pure play IDFC Mutual fund company.
Base case scenario would be that IDFC would need pay 20% tax on capital gains for selling stake in IDFC First Bank. Not sure but may be this 20% is applicable only on the price change since January 31, 2018 when capital gains on long term holding was announced. Price for IDFC First bank was 56.8 on that day.
Any bearish view to explain existing discount to NAV?
how can IDFC AUM can have a valuation expected of 5k crores. its profit was just 30 crores last quarter. its not even 1% of the profits generated from total AUM.
Please correct me if i am wrong.
A thumb-of-rule in AMC valuations is %of total AUM. Now, notwithstanding the outrageous valuations some of listed AMCs in India are selling at, a 5% of AUM valuation is a fair one for IDFC AMC. thatās how IDFC AMC is pegged at 5k.
The Qtrly profit figure is 30 crs which can be annualized to 120 crs. approx. Now these earnings are depressed, so a more normalized Earnings will show a PE of around 25-30.
RBI Internal Working group has submitted itās recommendations.
Seems like NOFHC structure is here to stay. But there is a particular provision that allows for it to be removed in case the promoters donāt have another subsidiary.
Asking for opinion of other invested parties in case my understanding is correct-
Selling of the AMC will make IDFC eligible to remove the NOFHC. But do current rules allow selling 100% of the AMC?
De facto mode for value unlocking is for IDFC to sell stake in the bank now and to also unlock the value in the AMC.
I couldnāt find the total extent to which it can sell itās stake in the bank though.
