My expectations of price action for the upcoming Quarterly results
There will be no negative surprises, hence no increased provisioning. This will cause another rally. A new all time high is on the cards.
All the current negatives have been factored in.
If I am not sure of something, I am learning to be honest with myself and realistic about my options.
So letās say I want to capture growth in Indiaās banking & finance space but I am not sure that one specific stock like IDFC Bank could get me there.
How could I still play this option/theme? Well, I could hedge my bets. There are atleast 5 index funds & ETFs that track the BFSI space in addition to plenty of Banking sector mutual funds.
If I can honestly do a comparison of average returns from these funds vs. the return this specific stock has given, I can then better determine the amount of exposure to this specific stock vs. the overall BFSI industry exposure.
This way I wouldnāt feel like a complete loser while hoping for the best with this stock.
So, if I am not completely sure about what I am doing, hedging can be my good friend!
I am writing this for novice investors like me who do not fully understand this business, so that they can understand that there could be better choice and options if one is prepared to look a little more broadly 
What should be a deserving Price/Book ratio for IDFC First Bank given its future outlook? Is the current multiple the right one. Any thoughts on how to think about that.
āIDFC FIRST Bankās P/B ratio will depend on its future ROA. As the ROA moves closer to 2%, the P/B ratio ā which is currently around 1.4ā1.6 ā can move towards 2.5 to 3. Looking at the current P/E ratio does not justify the valuation, because if we consider the bankās projected FY27 earnings, the P/E at the current market price would be around 14ā15.ā
Management may be calculative when taking a voluntary hit in NiM.
Sacrificing NIM to get CASA and stronger loan book. Due to this, we might see a very good year.
To achieve optimal RoA, good opex is needed, for which, in turn, a bigger loan book is needed.
QoQ growth of Loan book was awesome at 5%
If this keeps up, market will start factoring in the near future RoA of 2%. It happened with Bajaj Finance.
Ravi ji..any views from you for the above? What do you think of the monopoly of fasttag IDFC has? will it be of any use? Anybody can put some light into it?
The bank has shown outstanding performance in deposit mobilisation so far. The service level and interest rates, monthly credit of interest rates and no fee etc are responsible for that. For next two years the bank should grow deposits at the same pace. After that they can slow down by moderating the deposit rates along with bringing in certain fees for select services. At present juncture they should not do anything to disrupt the deposits.
As and when provisions go down which is likely by Q3 and Q4, the profitability will improve substantially, which would be enough to push the share price into three digits. Irrespective of profitability, deposit mobilisation remains first priority. Bank should stay the course as planned. Next two years are important for building long term bank structure.
Donāt know about how much fastag contributes to the bottom line, but I am surely looking forward to seeing a massive contribution from the credit cards.
We have been waiting for so many quarters to see the credit card department breaking even. it did so the last quarter and now the profits will start coming in.
well looks like they are moving in direction of improving the bottom line
IDFC bank is panned for low profitability. That raises two questions - (1) why has the profitability been low? (2) what is its true profitability (3) How will the profitability move going forward?
The answer to the first question is simple. In the last 5 to 6 years, I would estimate that the bank suffered from around 20000 to 25000 crore (in my estimate) of excess expenses due to it being a startup bank with a troubled legacy - Credit losses in legacy infra loan book, credit losses in microfinance book, setting up of 1100+ branches, building a best in class technology stack, building 2.5 trillion deposit franchise in a very short timeframe, building credit card and various other new businesses like gold loan, cash management business, etc etc. Banking regulations donāt allow capitalizing of expenses, which means this entire 20k to 25k crore expenses flowed directly into the bottomline, thus suppressing its true profitability.
The answer to the second question would be - To understand the true profitability of the bank, one has to add back this 20k to 25k of excess expenses to the reported profits of the bank over the last 5 to 6 years. If we do that adjustment, I think everyone will agree that the bank is hugely profitable at a fundamental level.
The answer to the third question is also simple. There are 5 big levers for the bank to become hugely profitable going forwards. (a) FD rates offered by IDFC are already comparable to the big established banks. Over time, the Savings account rates offered by IDFC will also start lowering and trending towards the much lower rates offered by big established banks. (b) The big investments in branch network, technology stack, new businesses like credit cards are behind us - the cost to income ratio of the bank will start trending downwards in the coming quarters and operating leverage will start playing out in a big way (c) IDFC bank will slowly pivot away from zero fees banking, and start charging fees for various services like all other banks do (d) IDFC has very low share of Current Accounts - IIRC less than 2% of total deposits vs around 12+% for established banks. Once IDFC builds a significant Current Account franchise, the cost of funds will see a significant improvement (e) IDFC bank has huge cross-sell opportunities which it is only starting to exploit. This will accelerate with time, especially due to its best in class tech stack that will help in digital cross-selling.
To summarize, I think its only a matter of time that the market recognizes the true worth of this bank. I am expecting it to go to 3x PBV in the next few quarters. And likely go to 6x PBV in the medium term. A bank that combines fast growth, quality franchise, quality management, excellent corporate governance and high profitability - this story will play out in the next 8 quarters.
Today I was looking at South Indian Bankās results. South Indian Bank is a small-sized bank, and its annual interest income and other income are equal to the interest income and other income of IDFC First Bank for just one quarter.
Even though both banksā income levels are comparable in this way, South Indian Bankās profit is more than ā¹1,300 crore, while IDFC First Bankās profit is around ā¹450 crore.
If we assume that South Indian Bankās loan quality is similar, then there is nearly a three-times difference in profitability, which suggests a significant opportunity.
If IDFC First Bank is able to achieve a similar profit level, its annual profit could reach approximately ā¹5,200 crore.
Assuming a P/E of 20ā25, the EPS would be around ā¹6, which implies a share price of ā¹120āā¹150.
At current levels, the bank appears to be available at a substantial discount.
South Indian Bankās NIM is half of IDFC First Bankās NIM.
How much difference does a lower NIM make to profitability?
What are everyoneās thoughts on this? Please share your suggestions.
Time and again, this thread buzzes with new investors and new enthusiasm on this scrip. Please do not go by the narratives built by the management. if you want to deep dive on profitability etc- please look at the breakup of operating expenses = you will find other expense to be a major contributor - try to investigate the other expense at your end.
the real NIM is actually hidden and not reported properly. there are some loan origination expenses which are being parked in other expenses - where breakup is not given.
please understand the business model of idfc first on how it raises assets and liabilities, where are the different headfs of expenses parked - which are related to raising assets and liabilities.
if you are able to investigate above 2-3 points - you will be able to arrive at real nim and real profitability.
i have cautioned so many times on this forum to not go by what is being said in interviews and public domain by management - most of the times its just marketing manual being followed - and hence its all shareholder and stakeholder management.
there is a reason why ROE is less than optimal - the ROE hasnt improved despite 3-4 years of so called high nim increamental loans (as mentioned by management sop many times). the prime reason is - real nim is less than 5 percent if u adjust for origination cost of assets and laibilities which are parked in other expenses.
Thanks for a different perspective. This thread needs it. Since, price has rallied from 53 to 83 there are no nay-sayers.
Other expense appears shady to you, is what I understand. Break up of it is not available. So, it could fall both ways.
I have tracked the managementās policy making through its worst time, Covid year. They were transparent. Even during the recent mfi crisis, they didnāt mince words.
I trust, they are ethical.
As loan book grows, Cost to Income ratio will fall in line. For now, I trust.
But I will keep searching for the other expense details.
Thank You
I sometimes think that management can shift the other income figures here and there for retail investors. However, if there had been any real issue with other income, then Warburg Pincus, ADIA, and other investors like GQG, who together invested around ā¹7,500 crore, would not have reinvested. V. V. would not have been able to bring Warburg Pincus back again with such a large investment. In the investment world, it is a very rare case for such a big investor to return to the same company again.
forget institutions - they work on different mandate than retail investors. they have large capital to deploy and banks are a easy park of money in india - recent fii transactions in. nbfc skace are a testament to it.
we should never base our thesis of investing based on - that intitute or fiI must have done their due diligence hence its fine.
Hi Vineetji, i like how your pessimistic about how the management is hiding its real numbers when it comes to other expenses. And it is true and its a matter of fact. DSA fees is through the roof and that is contributing to major chunk of our money going into such expenses. I spoke to a bank executive recently and they said that most of the origination is now in house and not from third party which i find it hard to believe. I like Amit and Ravi perpestive too, and i feel most investors have a good margin of safety and they are willing to wait , as VV says its a decadal theme and its going to take years to play out, so are we going to miss the oppurtunity cost in other stocks. I am not sure.. Occasionally we will find short burst of growth, which will eventually die down and again cycle repeats. Like everybody even we wish the compounding story plays out asap. But only time will tell..till then fingers crossed!
And as they say time and again, never fall in love with a stock. And i have fallen to that trap time and again. I hope this time not around..Peace and keep this thread buzzin..!
