IDFC First Bank Limited - First Bank Preference for Long Term Investors too?

Stock Opportunities
4211

Reposted as some garble in prior one

He could have got a Bank license for Capital First directly instead of getting a bank licence by merging with IDFC Bank. CF was posting 15% ROE and increasing continuously since 5 years.

If he had to acquire a Bank at all, he could have waited 3 years to acquire IDFC Bank. Let me paint a fair scenario of what might have happened of IDFC Bank stock in 3 years. With all bad news of infra tumbling out in March 18, June 18 and September 18, and with no ROE, this stock could have probably quoted 0.5 X B, which is 0.5X 38.44 (then BVPS), say Rs.19. Then the Dewan, Reliance Capital, Vodafone, Cox and Kings, Café Coffee Day, PC Jewellers, Future Group exposure, Entry Point of Mumbai Toll road all well known market issues, and other infrastructure loans would have arrived. BVPS would have eroded further. IDFC Bank stock would have gone down to say Rs. 10 (guessing). And probably sold out to some bank in and around this price. So, for an IDFC Bank shareholder, VV takeover has been great.

But from a Capital First shareholder point of view, the return has not been as great as a startup should make. It was at 120-140 in 2012-2014 when he took it over. For all talk of 9X, (adjusted for merger ratio of 13.9), at today’s price of 75 it is 1042 (75*13.9), it has delivered only about 17% CAGR, its ok.

I think RL was smart and good for his shareholders. He realised the problem and looked for a merger to deal with issues before they arrived (not saying sarcastically, I mean it). Finding a VV to merge with and hand over the Bank was his masterstroke.

On equity raise, they could have raised 4000 cr this year and 4000 next year at a higher price. Why raise it all upfront. Why pay dividends even while raising equity on one side?

By his own admission in AR and in AGM, he was sitting on personal leverage of having acquired Capital FIRST, while transferring stock worth Rs. 100 crores for social trust philanthropy etc. This forced him to sell stock during COVID at Rs. 20. Why gift to philanthropy when you have personal leverage? Any sane person will close the personal debt first.

By the way, it’s not that they are “choosing” to make low 7% ROE. That’s all they can make today, Excepting credit cards, none of the investments were discretionary
 branches, ATM, tech etc. these were all essential things to fix this bank.

I agree is a tough job to move the ROE needle from 0 to 7, but the market has other options. God knows if it will reach 15% ROE. Right now despite a good management, the bank as such is a dodo that cannot fly.

Only good thing they have done is good customer experience and positioning the bank as a good ethical institution people can trust. We can’t tell what it is worth, and whether it is worth this amount of premium for a low ROE Bank.

Btw, their own commentary for upcoming few quarters are real bad
 MFI, repo rate.. everything. Wonder why stock is strong.

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4212
  1. 9x in 13 years (2012-2025) is and 18.5% CAGR, that is what Warren Buffet made over his career, if you call it “Okay”, Sure!

Moreover this CAGR is being measured, when bank has just gone through an Microfinance Crisis. If you measure the same CAGR last year when stock was at 95-100, CAGR will be 23% CAGR

  1. Banking Licence is not as easy to get as you think. Its almost impossible to get this from RBI for a small NBFC like Capital Finance

  2. Acquiring a distressed company (like IDFC Bank) is very similar to buying a stock which is going through trouble. You are getting a good price today, tomw can you get a better price, may be but it comes with a risk that the opportunity might not be there tomorrow.

  3. Fund Raising does not have a single dimension of valuation, people evaluate/negotiate Whom to raise it from, how much to raise, what valuation and terms of engagement. Yes raising 4k cr would have been better but may the other side have some minimum shareholding requirement that they would like to acquire

I believe VV has done a phenomenal job in transforming the bank and he is an outstanding professional with so many consecutive successful stints ( ICICI, Capital First, and now IDFC)

The bank clearly has issues, thats the reason we are getting it at 1.4-1.5x book value

PS: Philanthropy and Risk Appetite (Leverage) are absolutely 2 different and independent characteristics of a person.

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4213

  1. No one said SBI is a great stock to hold either. Look at it’s returns in the last 20 years. If not for PSU mania right now, it would be even lower.

  2. Don’t care, we rather invest in a business who meets capital requirements through internal accruals.

  3. In the past there have been many cases where institutional investors too suffer losses of > 50%.

IDFC has not made money for retail investors since the last 10 years, and that period had two raging bull markets. It’s not a good investment.

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4214

Good investment depends on entry price and business performance.
There was lot of pessimism about stock price and company’s prospects around mid March when stock traded even below 53, very close to its book value. It has delivered good returns from that run from 55->78.

Buying this bank at Book value will be a good bet. At 1.45 P/B, expectations are certainly higher now. Most of the returns from last 4 months have come from multiple expansion. With expected growth in BVPS from earnings and that fueling further higher P/B ratio, higher returns than earning growth are possible.

I am a passive investor and haven’t run a business let alone heavily regulated business like banking . I was bit surprise by extent of the equity offerings but large fund raise definitely removes uncertainty related fund raising over next 2-3 years. I will give management latitude in operational and strategic issue such rapid product expansion, fund raise and even merger to acquire bank license.

It will be a candidate for trimming if P/B ratio expands ahead of earnings growth and alternative opportunities.

1 Like
4215

Thankfully my sense was right and it paid off to hold the stock from March till now. I have started taking partial exits as the price is much better than March and overall I’m not that big fan of this bank as a shareholder as I was till a year back

PS: No buy sell recommendation, please do your own research

1 Like
4216

Stock is at an interesting stage. Uncertainty is still holding it in check. The price jump in the last week happened after one single buy recommendation by investec. So it should be taken as only one more positive confirmation. If this Quarter results come out positive on 26 July ie net profit around Rs 1000 crore, then we may see another similar price rise of a few percent. In my opinion a sustained positive sentiment would require around 3 to 4 consecutive good quarterly results each coming at around 1000 crore+ net profit. Price would mature only after that. At present this stock is an unfinished work in progress product. Those who can wait should wait for at least 2 years. It is my personal opinion, and equity investment should be done based on personal research only. I am increasingly invested since 2018 so I could be biased.

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4217

1000cr+ in Q1 is unrealistic. They might do 3000+ cr for full year ( high than last peak of FY 24) but Q1 & Q2 will be weaker

Fresh slippages, Cost to Income and buffer provision release is sth to watch out for in Q1

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4218

imo, Q1 profit will be around 500-600 crores at best, as in annual report vaidyanathan mentioned that MFI impact will be there for 2 more quarters

has anyone noticed any mention of guidance 2.0 and ROA of 1.4 by 2027 and PAT of 12000-13000 by 2029 in Annual Report released yesterday as I could not find it anywhere
have they withdrawn the guidance 2.0 silently
?? :thinking::sweat_smile:

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4220

Don’t live in unfounded hope, particularly when management is themselves saying “the impact of these three things will play out in first two quarters”

Last quarter was 300 cr odd.. on top of it

Repo rates sharply by 100 bps in last few months (income has to drop q on q)

MFI book still reducing, Qon Q dropping. so further reduction in income

MFI provisions will continue into Q1 and Q2 26 (management own quote, not my words)

Every brokerage is expecting worse numbers for the entire system

So be logical.

Only good news is that they say by Q3 Q4 things should be better.

All my being upset about fund raise and dividend apart, i like it that management is guiding poor results.. hopefully stock would have factored it.

But for its low roa roe stock is always well valued .. maybe analysts like the management.. ive never figured the valuation..

I say “always” because this has always been low roe bank but p/b of 1.5 even when many other banks are at 13 to 14 roe and quoting below book

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4221

Did anyone see the provisional numbers from IDFC Bank? Last time, they published the numbers but I don’t see anything like that this time.

4222

No. they did not publish it this time