IDFC - Infrastructure Development Finance corporation

Stock Opportunities Special Situations
212

Major update on my earlier thesis:

Earlier Post:

In summary, i have mentioned multiple pathways post AMC sale and opinioned that a swap without giving dividend on buyback might have better shareholder value.

I have gone through the valuation method for Equitas Small finance bank (ESFB) and Equitas Holdings Limited (EHL). Report

Summary of the valuation:

  1. The report valued Equitas Holdings Ltd through two valuation methods
  • Holding Value summation method:
    By computing the value of ESFBL shares held by the EHL. i.e 172.61
  • Market price method:
    Market price of EHL on the day of valuation- 26th July i.e 128.13
  1. Then they valued Equitas Small Finance Bank Ltd through two valuation methods.
  • Market price method:
    Market price of ESFBL on the day of valuation- 26th July i.e 66.53
  • Market Multiples Method:
    Average valuation at which comparable companies are trading at i.e 66.24

  1. They took an average valuation based on the two methods for each of the entity and arrived at a final swap price.

    for EHL= (172.61+128.13)/2 =150.37
    for ESFBL= (66.53+66.24)/2 = 66.39

    Final Ratio= 150.37/66.39 = 2.26

Considering the Same valuation approach for IDFC Ltd and IDFC First Bank- have built 4 scenarios on basis of these valuation:
Sheet attached

Summary Below [Considering merger with today prices- Values can be changed in the sheet]:

  1. Dividend & Merger Method:
    A 100% dividend of AMC Sale proceeds and merger.

A dividend of 21rs will be paidout to IDFC Ltd shareholders, post that

Valuation & Swap ratio:

Valuation Method IDFC Ltd IDFC First Bank
Summation Method Rs 71.06
Market Price Method Rs 56 50
Comparable Multiples Method Rs 59.4
Average Valuation Rs 63.53 54.7
Merger Ratio # 1.16

  1. Dividend Buyback & Merger:
    A 33.3% dividend, 33.3% buyback & 33.3% cash retained & then merger.
    Shareholders will get a dividend of 7.3rs/share, Post that

    Valuation & Swap ratio:

Valuation Method IDFC Ltd IDFC First Bank
Summation Method Rs 86.84
Market Price Method Rs 70 50
Comparable Multiples Method Rs 59.4
Average Valuation Rs 78.42 54.7
Merger Ratio # 1.43

  1. Buyback & Merger Method:
    80% buyback [Max Possible amt] & 20% retained for the merger.

    Valuation & Swap ratio:

Valuation Method IDFC Ltd IDFC First Bank
Summation Method Rs 98.48
Market Price Method Rs 70 50
Comparable Multiples Method Rs 59.4
Average Valuation Rs 84.24 54.7
Merger Ratio # 1.54

  1. 100% AMC Cash retained scenario.

    Valuation & Swap ratio:

Valuation Method IDFC Ltd IDFC First Bank
Summation Method Rs 92.98
Market Price Method Rs 56 50
Comparable Multiples Method Rs 59.4
Average Valuation Rs 74.49 54.7
Merger Ratio # 1.36

In a nutshell, IDFC Ltd post-AMC sale should try and maximize stock price & its NAV. This can be done by doing a open market/tender stock buyback for 25% of the equity shares at a price lower than its NAV, preferably at < 75rs. This will significantly increase the merger value of IDFC Ltd with IDFC First Bank.
Option-3: 80% buyback & merger seems like a value accretive option for IDFC Ltd shareholders at the moment. But, in case the holdco discount reduces and if IDFC Ltd trades at >30% premium to IDFC First Bank then even no payout complete merger(Option 4) will also make sense.

This is a super interesting scenario - IDFC Management folks want to give the entire cash to the bank & Shareholders want a payout-Interesting to see how this goes.

Note: One can plug in their own assumption of merger day prices, AMC sales fund usage in the attached sheet to arrive at potential swap ratios across multiple scenarios.

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