IDFC First Bank Limited

A long-short strategy for 100 shares IDFC Ltd long and 155 shares IDFC First short.

The idea being to buy 100 shares of IDFC Ltd (long position) and simultaneously short 155 shares of IDFC first (short position). If the merger is successful in 9-12 months, its a 12-14% gain on the trade on which taxes are to be paid. If done with a couple of million in the above ratio, its a decent return.

Risks:
a) The merger does not go through (the long moves down and the short moves up dramatically)
b) limited upside on the trade
c) Taxes if STCG or LTCG depending on how long it takes.

Any thoughts or something that I’m missing here?

Regards
M

2 Likes

Looking at examples of Ujjivan and Equitas, merger can take 18-20 months atleast from the date of announcement…

1 Like

Donation made from vv sir
423ff5a1-e110-40f5-84d4-3e59524c4a78.pdf (196.4 KB)

2 Likes
  • :moneybag: Insider Mahendra Shah sold ₹49m worth of IDFC First Bank stock at ₹87.93 per share, reducing holding by 47%.
  • :chart_with_downwards_trend: Insider selling suggests lower valuation perception.
  • :briefcase: Insiders own 0.5% of the company, showing some alignment with shareholders.
1 Like

according to me this is again to get the 12-14% of benefit by shifting to IDFC

4 Likes

Scuttlebut
I know a person who works as insurance agent.

A year back he took consumer loan for mobile around 35k. He repaid it. After that he was getting calls for loan from idfcfb every week but he said that he didnt need loan so didn’t applied.

Recently he applied for personal loan online at idfcfb around 85k.
Within a day he got amount in bank account. I asked about verification and all other paper work, he said idfcfb person visited his home & job place in same day when he applied online.

Also asked about interest rate he was saying 27% yearly :person_gesturing_ok:, still he is happy with bank and bank service. He is thinking to continue his relation with bank.
I asked him that after paying this loan will he again interested to take loan from the bank, he said he will surely think as he is happy with the bank.

(Extremely sorry :see_no_evil: for my english)
Invested : biased

3 Likes

If this is true, it is against the thesis that they don’t sell a product if they cannot sell it to their family members. 27 percent yearly is too much, more than microfinance. Please confirm again, I doubt this is true.

4 Likes

Yes I am also in doubt , i will confirm it again.

Just talked again (actually I know him more 20 yrs.)
He said loan amount 84000 personal loan.
EMI 48 months (4yrs)
Installment 2899 per month.
I calculated it’s 27% (repay amount 138900 something)
(I have idfcfb credit card , rate 15 to 18% )

2 Likes

Please find below the link for personal loan interest ranges charged by different banks and factors that affect personal loan interest rate. Usually loan amount and interest rate are decided based on risk profile of a customer.

3 Likes

Interest rate is not 27% please. It is infact around 17 - 17.5% (depending on any processing fee charge) - as the disbursement is upfront and repayment is in EMI over 4 years

3 Likes

Person has email from bank mentioned this interest rate.

1 Like

HDFC bank added 1482 branches from June 2022 to june 2023.
In the same period

SBI added 140 branches
Kotak 86
Axis 186
ICICI 540
INDUSIND 320 & IDFC F 173

10 Likes

This should help put the high cost to income ratio in perspective…

2 Likes

This page in the annual report gives break up of the operating expenses but there is other expenditure of 6,737 cr which is ~56% of the operating expenses but there are no other details about this expense.

Does anyone have any insight about break up of this expense item? Looking at other banks, it seems this line item includes agent commission, loan sourcing and recovery agent commission.

I wish the bank gave more details about this important and large item of 6700 cr in both annual report and presentation which are very verbose and lengthy but still missing important and relevant information.

Which expenses would be growing slower than revenue as bank’s operation achieve scale?

11 Likes

Page 312 of AR.

Page 210 of AR.
Fees paid for purchase of the PSLCs is recorded as ‘Other Expenditure’ and fees received for the sale of PSLCs is recorded as ‘Miscellaneous Income’ in Profit and Loss Account. These are amortised on straight line basis over the tenor of the certificate.

2 Likes

This is true. Although, it is not possible to short in cash market for overnight held positions. So, one has to short in F&O, which can be done for a maximum of three months at any point of time.

Any profit and loss in F&O is added to other income/ business income and is taxed at marginal rates. So if you are in 30% tax bracket you are going to pay 30% tax and not 15/10% capital gains like the cash market.

Having said that, what you said makes perfect sense, since there is a 15-16% arbitrage between the stock prices based on their current market price (CMP) and the merger ratio which is already decided and approved by the resepective boards.

For the uninitiated, this works like the following:
CMP of IDFC Limited is Rs 121 and CMP of IDFC First is Rs 91. For every 100 shares of IDFC, we’ll get 155 shares of IDFC First @ effective price of Rs 78-79 including brokerage, which is at a 14% discount to its CMP of Rs 91.

As the date of merger approaches this arbitrage will vanish eventually. This is the “special opportunity” some of us can take benefit from.

Of course one can buy IDFC (which I have done) but that does not guarantee a profit. Because when the arbitrage vanishes it may happen by significant erosion in IDFC First share price as well (rather than appreciation in shares of of IDFC Limited). Also there could be overall correction in the market which could result in both shares correcting, with lesser correction in IDFC compared to IDFC First. In this scenario, buying IDFC helps in limiting downside but does not guarantee a profit.

My reason of buying IDFC is not for pocketing the arbitrage. I have bought IDFC because I believe in IDFC First, and buying IDFC Limited gives a cheaper cost of acquisition for IDFC First. For pocketing the arbitrage, one has to execute the long-short strategy that you have mentioned.

In the F&O market, the lot size of IDFC is 10000 while IDFC First is 15000 shares. Therefore an exact ratio +100 IDFC and -155 IDFC First is not possible. One can do a +100 IDFC and -150 IDFC First which is good enough.

Suppose on Sep 1, one buys one lot of IDFC Ltd with expiry date of 30-Nov-2023. Simultaneously one has to sell one lot of IDFC First with the same expiry date of 30-Nov-2023. Around 30-Nov, one has to roll over to the furthest series again based on visibility of merger. I recommend buying furthest expiry to reduce transaction costs. One has to provide the required margin for this trade, otherwise there will be huge interest cost on the margin since this exposure will remain open for a long time.

As the arbitrage disappears this trade will become profitable. There are three/ four scenarios:

Both stocks appreciate, but IDFC Ltd appreciates more than IDFC First
Both stocks correct, but IDFC First corrects more than IDFC Ltd
IDFC Ltd appreciates and IDFC First stagnates or corrects.
IDFC Ltd stagnates or corrects slightly, and IDFC First corrects significantly.

Basically the price ratio of 1.33 (IDFC/ IDFC First) will get closer to 1.55 giving 15-16% returns. Of course there will be transaction costs, rollover inefficiencies, and one has to pay 30-35% tax.

The only risk that I see is somehow the merger decision is rolled back.

15 Likes
6 Likes

Generally speaking, the arbitrage is a good idea if three conditions are met.

First, you own shares of IDFC First.
Second, you have a large capital gains tax credit sitting in your account.
Third, you have a low cost broker to execute the trades

If you have all this, then as on today, you can probably lock in a gain of about 17%, on your existing position of IDFC First.

Ofcourse there are risks.
For instance, the merger may not go through. Or the ratio may change etc.

Work through the numbers, and the difference scenarios and see what works for you.

Discl: Interested.

2 Likes