IDFC First Bank Limited

Recent quarterly presentation reads…

Loan book to grow from here on: We have made significant progress during the last three years (FY 19-22). We expect the loan
book to grow at ~20-25% on a sustainable basis from here on for the foreseeable future. We have strong and proven
competence in building retail lending business with high asset quality (GNPA ~2% and NNPA ~1%), strong margins, and high ROE
(~15%, incremental ROE ~20) for over a decade.

I don’t doubt why market is rating idfcfirst bank above Indus Ind and IDBI. In fact, I feel it should be rated all the way upto Kotak at PBV of 4.

Some reasons that come to mind…

*25% growth in Loan book for the foreseeable future
*Improving margins, one of the best in Industry
*Ethical management (most important, which is not the case with IDBI or Indus Ind)

I haven’t studied idbi but indusind has a chequered past of corporate misgovernance

Banking is last space to look at through the lens of numbers. Numbers are a multi year lagging indicator of success.

Top 3 leading indicators are:

  1. Management
  2. Management
  3. Management

But for that one has to go through 5 years of annual reports, dozens of concalls, dozens of investor presentations, many QIP documents, and of course dozens of varied scuttlebutt

Vv has executed a turnaround at capF and see what capF valuation were and how p/b rose with higher roe (since growth was always there)

The exact same thing will happen in idfcf due to the growth

Being able to grow a retail lender with low credit cost is an art which vv has perfected not all banks can do this

  1. Retail lending with low credit costs (compare credit costs not to hdfc bank or kotak bank, compare them to Bajaj finance or some other retail focussed nbfc)
  2. Building a casa franchise from 0 in 2 years (remember that indusind always gave higher saving rate too, but was unable to gather as much casa as idfcf. Idfcf has truly build a brand. Despite sa rates of around ,4-5% for the most of savers, casa is growing 7-8% QoQ this is extraordinary. Compare to casa growth of indusind & idbi)
  3. Observe the subtle hints of conservative underwriting shown be it early recognition of NPA as soon as stress appears (don’t wait for repayment), or whether it was upfronting all the credit costs in q1fy22 in order to clean up books asap rather than delaying the pain by offering restructuring (some banks like equitas have delayed pain by offering restructuring aggressively. Imo this is it conservative banking)
  4. Deep tech investment & also innovative market products. One does not need to look beyond credit card to see how innovative bank is willing to be in order to please the customer

When one sees from this subjective lens of the softer aspects one is able to develop a keen knack for leading indicators rather than relying on screener.in headline numbers which are a commodity in today’s day & age

Disclaimer: invested in idfc & biased

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This is inaccurate. IDFC FB’s networth is 21k cr as on March 31, 2022. Based on that, the bank is currently trading (mcap of 23600crs) at a P/B of 1.12, which is much much lower than IndusInd.

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Trading at around 0.85x on FY24 numbers, this is without factoring in any benefits from the reverse merger. Also the PE is around 8x on FY24. Imagine a company growing operating profits at 45% for the next two years available at 8x earnings, IT companies growing earnings at 20% are trading at 40-80x PE!

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This is true.I tried looking at various screeners like screener.in,moneycontrol,tijori etc where the book value mentioned is inaccurate and much lower than Rs33 mentioned in their presentation.
So that gives a wrong picture for the potential investors if he is just looking at the screeners to make his decision.

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Watch The Business Standard Banking show in You tube at 11 am today.
Vaidyanathan will talk about IDFC First bank.They also discuss about Equitas merger.
Should be Interesting…

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The article flags asset quality issues…
Note: I’ve not studied the stock in any detail… just sharing a contra view trying hard to understand why an apparently high growth stock is getting slaughtered in the markets

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Asset quality is not great but seems quite decent and on track to be pretty good by next year

Disc: invested

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Rerating in this environment is unlikely. Everywhere you see there are uncertainties, markets don’t like that. To be rated above 2 P/B the bank needs to show consistent improvements in all metrics for atleast another year.

Now would be a good time for the management to start focusing on improving cost-to-income at a faster pace if they plan to do QIP in the next couple of years. IMO even if NPAs improve it won’t help much if opex remains high.

Disc: invested, one of my largest holdings

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I feel the following is required to change the market sentiments towards the bank.
-Move Agressively towards closure of the reverse merger deal.
-When the toll account(800Cr) moves out of NPA(Should happen soon since the company IRB has raised funds recently) bring atleast 70% of the amount in to the P&L if not more rather than being conservative and use those for balance sheet strengthening.
-This will provide a bump up in the profit numbers and profitability metrics which is required for it to move out of this range.

Bank should start reporting 20% plus YOY growth from this number which should also boost the confidence of the Investors.
Most of the parameters they are doing good what they need is a small fillip to move out of this range.

Disc:Invested

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Look at the move of few stocks such as RBL,Ujjivan,South India bank etc where the stocks are moving at 8% plus in a day post the results where as IDFC despite good results has never moved at this pace.

It has been managed to stay in this range and hence moving out of this range is key for further move up.

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In various interviews Mr VV has clarified as to how the cost to income ratio is going to reduce as a result of high cost of fund being replaced with low cost casa. Ifwe compare the targets set by Mr VV at the time of merger for the next five years and the results achieved so far inspite of the covid, it can be seen that management has achived more than that. We have to have patience and give 2 to 3 years to Mr VV to repeat his performance as in Capital first. Seems to be a good storey in the banking sector.

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I agree. unlike the rest of you, i think the market may not entirely believe VV’s growth projection of 22% in FY 23, because the last 3 years he has grown too conservatively at just 6%.

I dont think there is any concern on asset quality … had been invested in Capital FIrst and watched them for 10 years, in 10 years there was never even one quarter where there was a credit issue… management is pointing out in the investor presentation that not even in time of demonetisation there was any issue. the management is saying it will come back to 2% and 1% gross and net, (its there in their presentation), and the trend line they have shown says it will get back there… one more issue i feel apart from not having a track record of low growth, is that when markets correct in a crisis, the mid caps take the larger brunt… as the few buyers go for the big names.

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Disc: Invested; Largest holding.

I don’t really mind the price trough IDFCF is stuck in. It is allowing me to accumulate more at better prices. If we take the maturing high interest infra bond earnings per share they’d generate by replacing them with CASA, and apply a PE of 24, the price of each share comes to around 33. This means the income generated from the 4% interest deficit going to be created itself when valued will give the stock a price of 33. ,(1000cr earning /620 outstanding shares X 24 PE).

This does not include any other business/banking activity of the bank which will also contribute to this value. Be it retail banking or credit card business.

With this in mind, the stock is basically unbelievably cheap, in my opinion because the current price will be realised as earning over the next 3 years without doing anything from the bank’s side. It’s a definitive fact. Even if we discount that price to present value, we’d still be looking at today’s pricing as ridiculously low.

As VV has said they are not looking for QIP this FY, and has no other loans against them personally, so low prices are not going to impact the capital structure or VV’s holding. Hence, another quarter or 2 of low prices is an accumulation opportunity for me until the earning ratios turn better and clarity on RM emerges.

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Imo, next one year will be interesting. Unlike any other in the past.

Reason:

*Management is going to focus on loan book growth.

*They have put a lid on operating expenses

*Rising rate regime, it increases margins.

*Most important of all, provisioning is going to be low.

These four positive factors have not come into effect in the past, but will all contribute in next one year.

Having said that, one cannot comment on stock price movement.

Edit: For next one year Reverse Merger might not come through.

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