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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IDFC First Branches till 1 May 2022.xlsx (133.5 KB)
As per data from RBI web site, total number of branches 864. Please refer attached excel sheet for reference. I think once number reaches to 900 they will stop expenditure on this kind of expansion which will help in increasing profitability.
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The Quarterly Presentations have quoted saying 641 branches are in place, up from 599 last quarter.
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They opened 40 branches in the semi urban and semi rural areas , they mentioned during the concall this quarter.
I had pointed this out earlier, will point out again
Investor Presentation shows only retail branches.
In this branch data there are a few MBL branches (119), if we remove those and maybe a few other we should get exact count.
(MBL i dont know it means but bank does not open Savings account in these branches, these are only for loan)
This page has seperate tabs for different branch types
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Spoke to someone
MBL - … Business Lending
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3 years ago, when I opened my account in idfc bank, there were hardly 4 branches in gujarat.
Today its about 36 branches in urban tier 1/2 and 36 in tier 3 cities and expanding further.
18X expansion in the state in 3 years.
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Hike in interest rate on FDs. Effect of RBI’s hike in repo rate which compelled the IDFCFB to raise rates to stay competitive in the industry or is the bank gearing up for loan book growth.
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Growth is on their minds.
Am seeing ads in premium newspapers (yes, I still read em).
They have given guidance for 20% growth. I feel they can easily do it.
20% growth coupled with strong margins, opens the possibility of this bank being priced like Bajaj Finance, a year down the line.
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Despite decent quarterly performance and management commentary, why is market thrashing IDFC twins so badly.
When other banks are getting stabilized now, but IDFC shares are still in free fall and making new lows.
However I can only see positive comments/feedback in this topic 
Why is market still not convinced? What are the reasons?
Is it only becoz of delays in merger? valuation gap compared to its peers (Federal, RBL)?
Markets not believing VV’s guidance and projections? concern on higher cost to income ratio?
As an investor, what is your action? Accumulate-and-average at this level / Wait-and-watch?
Disclosure: Invested
Please note: I’m not good in interpreting financial ratios for Banks.
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At end of day, 2 ways to look at exactly same information:
- What bank investors would say: Most investors are influenced heavily by price & do not have capacity to suffer. They see price as anti thesis & claim that market knows something which we don’t. Market can remain irrational for many years. Eventually market will recognise good performance
- What bank non investors might say: bank investors are biased, are not seeing writing on the wall, are ignoring anti thesis
At end of day, bear needs to have better anti thesis than just price. Price can remain separated from fundamentals for long.
Let’s objectively see how bank has turned out in last few years:
- Merger. lot of infra pain
- Covid, 2 years of pain. Largest cashflow shock of 100 years. In parallel costs to build the casa liabilities which is backbone of any bank
- Asset aide was showing 0 growth because infra & corporate loans were being substituted with retail loans
Investors who came in in 2018 were signing up for all of this pain period. (1,3 were predictable, 2 was a surprise). It is the investors fault if they expected quick bucks in this investment.
Thesis for investors is that pain period is behind them. From here on out bank should churn out profits every Q with double digit roe by exit fy23 & 15% roe by exit fy24
No full fledged bank in india which makes 15% roe trades at below 2 times price to book
At end of day, we wil only know 3 years from now whether investors had better thesis or non investors had better anti thesis. That is the beauty of market. There is scope for full disagreement which leads to healthy markets
Key thing is for investors to stick to thesis & for non investors to have an open mind to be Convinced by data. What data would convice each non investors they must ask themselves. For some it might be 2% gnpa, for some it might be 20% aum.growth, for some 15% roe, for most only price will move conviction because for 90% participants bhaav bhagwaan che
My thesis is as following:
- Better cost to income each half year trending to 55% in fy25
- Aum growth of (20-25%) each year for next 3 years
- Ppop growth of 40-45% for next 2 years at least & 25% thereafter
- Gnpa trending downward every half year converging to 2% gnpa 1% nnpa in next 1 year
- Finally, 10% roe exit fy23 15% roe exit fy24
As long as my thesis is in tact, lower prices are only attractive margin of safety discount offered by irrational Mr market who is manic depressive.
If thesis breaks down, i exit. As simple as that. Until now vv has executed on each & every guidance provided (ex of delay of 1-2 years due to covid)
Btw marathonondreams bhai, nobody is neutral outsider. Each investors has to decide to invest or not. At these prices who chooses to not invest is negatively biased
Disclaimer: invested, positively biased
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