IDFCFB started in 2015 @70 INR. Today its 57 INR, after 10 years. The stock has seen 57s many times in the past, 2015, 2017, 19, 22, 23…revenue has quadrupled from 2017 but equity capital has more than doubled.
It’s cheaper than HDFC and ICICI banks but for a good reason. Profit margins are nowhere near those banks, obviously.
Thing with IDFC is that it always looks like better days are just around the corner, but its been a value trap since long.
The price before 2019 is not fully relevant now, and unlike what many people believe, a loan given to a toll project that turned ‘bad’ or exposure to the periodically struggling microfinance sector are not the real problems of the bank.
Before obtaining a banking license in 2015, IDFC was originally set up to finance infrastructure projects. It had no access to cheaper funds from current and savings accounts, and infrastructure projects had very high NPAs.
Only in December 2018 did IDFC Bank and Capital First merge to become IDFC First Bank. Hence, the price before 2019 should not be considered fully relevant now.
V. Vaidyanathan, the MD & CEO, came from Capital First with prior experience at ICICI. The new team reduced infrastructure exposure from 22% of the loan book to just 1% and brought down legacy high-cost funding from ₹50,970 crores to ₹6,682 crores, thanks to fast-growing bank deposits.
As they turned profitable by overcoming legacy issues, they increased spending on many new lines of business. On one hand, the bank was becoming profitable, and on the other, operational expenses were rising as they heavily invested in building the new bank from scratch.
Currently, ₹43 out of every ₹100 they earn goes toward operational expenses. In comparison, ICICI and HDFC spend just ₹20 to ₹24. This highlights both the opportunity for improvement and the reason for thin profits, making the bank appear inefficient.
As a new bank, instead of starting one line of business after another, the management aimed to become a universal bank and launched multiple lines quickly. That’s why their margins are thin. However, as per them, they have completed most of the major investments, and margins are expected to improve.
Microfinance, which will soon be fully insured, accounts for only 4.8% of the loan book and affects the entire industry. This, along with a single infrastructure loan, should not significantly impact profits. However, since margins were already thin due to operational expenses, these issues appear more prominent than they actually are.
As operational expenses decrease, margins will automatically improve, leading to a rise in the share price. The CEO has also considered providing fixed and variable expense details in the future, which increases my confidence.
While banking services are increasingly commoditized due to similar pricing across banks, customer service remains a real competitive edge that cannot be easily replicated. To objectively measure their service quality, check Google Maps ratings for multiple branches across India and compare them with those of other banks in the same area. Also, check their mobile app ratings—they are far ahead of HDFC and ICICI.
Thanks to Trump, microfinance, and a toll project, the stock is available at ₹57, whereas the book value is ₹51 ₹45 edit.
Disclosure I have invested for the reasons mentioned above. I started my capital markets journey a couple of months ago, and I am a novice. The price may go down even further after Q4 results due to Microfinance loans.
Present Book value per share is 51.64 not 45…
I copied book value from Screener. What’s your source?
From the company investor presentation. What you see on different websites are not accurate at all, or its nt been updated, especially money control.
I have been invested in IDFC from 2020, and all who are keenly watching the stock know that nothing is going to happen in the stock until 2027-2029 ( due to Opex and Legacy issues) . Till then it will keep moving up and down i feel. By then the bull market that is going to start in mid 2025 will be over by then and then again the stock will go down another 40 %. So any real movement in price will be seen after 2030-32. That is why V V keeps saying that he is in for the long term decadal game and not 3-4 years. He knows that real movement won’t come until then. And there has been many times V V itself has said something and he does entirely opposite! So he is no saint but he’s not a crook either. He’s trying to save his company price from falling and he knows it will achieve the target but not sure when!
I’m more worried about the eq dilution.
I am pretty sure share price will fluctuate in 2025 and in 2026 and in 2027…Something will always happen to the share price. I am sure, we will not have to wait till 2030 or 2032 for real movement (if that means 50% or higher move). It will take 15% returns for stock to double from here and 25% to be triple from here. I am expecting it to deliver something in between but hoping for closer to 3x from the current price.
I am also 100% sure that there will be equity dilution. Equity dilution is not always bad for the shareholders if it helps the company achieve higher ROIC. Most of the Indian banks have needed capital to grow faster than allowed by their net income. It was even weird that they will regularly issue dividend and then again raise capital every 3-4 years as they needed more capital than generated by the business. Both paying dividends and raising money cost money to shareholders in the form of dividend distribution tax and investment banking fees.
I hope IDFC First doesn’t pay a dividend at least for the next 3 years and possibly more but I can see it paying a dividend sometime in 2027-2028. Moreover it can even lead to higher P/B multiples for banks due to signaling effects. So maybe paying 5-10% of the net income via dividend won’t be such a bad strategy.
I will hopefully trim holding if it goes above 3 P/B and ROE is not spectacular and add more if it stays closer to book value. Setting up a bank is hard everywhere and definitely in India. Growing business is also hard. This bank reached the top 7-8 positions by share in a very short time. Maybe other banks approaches are better for shareholders but I feel IDFC mgmt is trying and succeeding to a large extent. Their approach does seem more technology aware, customer centric and entrepreneurial not just to challenge PSU but to also poach customers from more mature private sector banks.
Banking is a cyclical business. In India, private sector banks had a relatively easy way to poach market share from PSU so cyclicality wasn’t so pronounced. I still remember ICICI being available at dirt cheap and very expensive valuation in the last 20 years.
Hi, what i meant was to see a share price appreciation of 5x from current price might take around 2030-32. Since its going in a more digital way compared to other banks i feel they will have an edge 5 years from now but do they have any USP i don’t think so. I just feel VV is more vocal about his digital capabilities compared to other CEO’s who keep calm and do their work. Anyways i am in for the long haul and will keep posting every quarter what i feel about this stock. Thank you all for your valuable inputs…!
Share price appreciation will depend on how VV handles contingencies.
Other than that, i’d agree that the core is forming well.
Couple of points from the recent concall:
2000 Crores is being spend each year. This will reduce in amount, and as a percentage. Hence, CI ratio will improve. Its in play. By, 2030 this expense will become zero.
Credit Card business lost 300 Crores last year, 180 this year, will reach breakeven next year. Again, by 2030, it will earn 600 Crores each year.
The market will perceive the bank differently as 2029-30 approaches. Target RoA is 2.40 by then. Currently around 1.1
As this gap reduces market will start giving a higher PE. Kotak Bank used to trade around 35PE for the longest time, in comparison, our bank has much better numbers barring the obvious.
Another positive:
VV admits the shortcomings (MFI or Opex), is conscious and cognizant. Hence, in time, they will be solved, as the plan is already in place.
What gives me this confidence? The fact that he has solved even bigger structural problems.
5x fr rom cmp of 60 ?
I’d disagree. Safely so. 
FY23 EPS was 3.75
compounding it by a safe percentage of 20 till 2032 gives an EPS of 19
considering a safe PE of 20 the price lands around 380, around 7x
If market decides to give a PE of 30, just in the bull market, the market cap changes quite a bit. And it’s likely cuz the banks still in the formation stage and is at 20 PE.
I believe if one agrees with this vision he should stay invested.
IMO, the quality of the business is very good. Entry barrier is very high, Management is honest, maybe not the best, Moats are being put in place. Now, as investors we only have to sit on it. Let time do the rest.
I understand the basic banking and have good faith in idfc first. Lot has been discussed so do not want to get into that.
My reason for posting here is outside of basic banking operations. I want to know if banks, with current rules in place, are allowed to venture into insurance, MF etc?
If yes, there can be lot of leverage play here due to brand name.
Can someone please answer this?
I dont tract much of banking stocks; so correct me if I am wrong…
Currently mostly all the banking stocks are trading at less than 20 PE. Most of them at less than 10. Be it small banks, big banks, private banks, public banks. So why should IDFC First Bank command 30 PE? Asking just for my basic understanding.
Banking as business is over, Indusind bank debacle is again proving even private banks are frauds. Highest leverage, highest risk, highly prone to macro headwinds, all will trade at 10 PE. IDFC is the worst performing of the lot. Last 10 year returns negative, next 10 year returns will be muted. I know this post will be flagged by owners if this thread as they don’t accept the facts.
What are the moats being put in place according to you? Thanks.
Happy to buy HDFC Bank, Kotak Mahindra, ICICI and IDFC first from you at PE of 10.
Not sure what value you want to add by such a post.
IDFC may have very bad returns for the last 10 years but an amazing return if you bought it during March 2020. There was a time when 40% IDFC First + IDFC MF business was available for purchase for 2500 cr market cap. I was lucky to purchase some at good prices.
Reading some of the comments on this board, I feel a lot of investors on this board should invest via MF.
Investing is very HARD to make money consistently. Almost impossible to outperform full time fund managers with long track records. It takes a lot of skill, knowledge, time, patience and luck. Even the great Prashant Jain suffered long lean periods.
Doing it for fun, intellectual curiosity or challenge is good but to make money, MF route would be best for the most investors. I have been dabbling in markets for 20+ years and have MBA + CFA and still this is very challenging.
You haven’t factored in the multiple rounds of equity raise they will require to grow leading to equity dilution.
Despite this, if business broadly plays out as outlined by management it should lead to good returns for patient investors.
The conflict i always face will thinking of investing in IDFC first bank, despite being their customer, is that several other very well run private banks are available at reasonable valuation and IF a black swan event like the one at IndusInd props up then entire thesis will go for a toss.
We could argue that it is a very low probability risk but seeing the issues with MFI book and maybe personal loans/credit card outstanding in near future, whereas HDFC Bank was prudent and tightened lending BEFORE meaningful stress had built up.
By giving out loans at higher interest rates to maintain NIM’s at higher levels there will always be more inherent risk with IDFC first bank is what I feel.
We can see the markets being jittery towards the like of IDFC vis-a-vis HDFC Bank and this trend may continue in the short to medium term in the debacle around IndusInd Bank.
Disclosure: No position but tracking
I am happy not buying IDFC Bank in March 20 instead i bought Tata Motors at 67, Apollo Tyres at 83 and PCBL at 85. Wealth creation will not happen in financials. From March lows my portfolio is still sitting at 37 times which peaked at 51 X in August 24. Investing is an art, having financial degrees doesn’t make much difference. Basic knowledge required to assess market can be gained over period, human psychology understanding is 90% requirement to make profits and avoid losses, balance sheet is only 10%. Have paid huge tution fee in Yes Bank and never bought a bank after wards, returns are phenomenal which proves my decision was right. Banks have proven to be a bad business during every market downcycle, be it ICICI in 2008, Yes Bank 2020, Indusind has junk portfolio, just saved because of Hinduja’s backing. All PSU sector 15 year returns are either close to zero or sub normal. One tweak by RBI took Bandhan, Spandana, Credit access to three year lows. Large Banks, SFB’s, NBFC, Fintech, current bank earnings are just wholesale banking which is a commodity. Commodity never trade above 10 PE. I am a critic of banking business hence my thoughts, no offence. I am a victim:joy:
True.
Here is the thing. How many banks have consistently posted 20% CAGR on EPS for the long term? Maybe HDFC, Maybe Kotak has done. The inherent probability is extremely low as banks are subject to economic volatility.
I’m sorry, but even in these five years, IDFC has not shown consistency. So, what is the probability of that in the future? Financials and banks are all about management. VV may be a good talker and has ensured good service and digital standards, but in the end, the only thing that matters is credit costs/NPA in a downturn. That is the only metric based on which banks should be measured. The jury is still out on that one.
What I decry is everyone believing it is a sure-shot story and will deliver multi-bagger returns.
I am happy for you that you have made good purchases during 2020.
Banks are cyclical businesses and there are definitely poorly run banks and well run banks. Then there is a price consideration even when purchasing a business with good prospects and management. Paying too much even for good businesses with good management will likely generate mediocre results.
Ability to identify differences between HDFC vs ICICI in 2007 and again 2017 would have worked wonders for investors. Purchasing HDFC in 2007 gave much better returns for next 10 years even when everything went down in 2008. But this is very HARD. Maybe you can do it by understanding human psychology and not giving much consideration to the balance sheet but one can be trapped into things like Yes Bank. Quality and honesty of the management matters a lot more in banking compared to an average business. I never trusted Rana Kapoor after reading what he did to the children of his co-founder and brother-in-law. So to some degree investment assessment is about reading between the lines, analyzing management beyond studying financial statements. I still do not agree that financial analysis matters only for 10% but maybe it does for you.
PSU sector companies have performed poorly across the sector so it is not useful to draw conclusions based on PSU banks performance. Even PSU banks have delivered solid returns when bought and sold at attractive price points.
RBI action has impacted performance of companies but the same is applicable to regulator/judicial actions to other sector companies. Look at the history of telecom, cement, airline…
Feel free to ignore any sector/company/entire market if you feel it is fraud ridden or even business is over. Declaring Banking as business is over sounds like fearmongering and superficial when that might be a time to investigate if there are attractive investment opportunities during such time.
For IDFC First, it would be good to answer valuegrowth’s question about moats being put in place.
For banking the most important moat would be having an ability to garner huge low cost deposits. Now IDFC first is moving there in the right direction. They have had huge growth in the deposit with falling cost of deposit. It looks like they will be able to continue this in the next 4-5 years along with the cost of deposit going down. Having low cost of deposit enables banks to go after low risk lending AND maintain good NIM and good credit quality. The bank is trying to maintain good nim and credit quality but with higher rate lending(possibly indicating higher risk of default) which is more risky than doing lower rate lending.
The second source of moat would be earning sticky non-interest income which is less risky than interest income. IDFC First’s efforts via tech, customer service, ethical banking and whatever else they should help them drive this component higher.
If we assume banking is a cyclical business then it is okay not to have consistent results but to have better performance than peers during up and down cycles. Almost all businesses have cyclicality. Mostly HDFC delivered consistency by going slower at time than competitors but it was operating in a different era with different competitive dynamics. I would like to see bank growing its book value at 15-18% on average and NOT every quarter or year. If it can deliver every quarter or year then it is amazing but for those stocks entry price points is much higher P/B ratio of 1.1. IDFC First will have fluctuations in profitability metrics for next 8-10 quarters and hopefully beyond that volatility will be reduced but not completely eliminated.
