Great news about the AMC. As per this article industry experts expect IDFC to get a valuation in excess of Rs 5000cr, which is around 4% of AUM. Current market cap of IDFC is just 9000cr
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Valuation estimates in the article are still way off than what IDFC paid for acquiring AMC business in 2008 which was 6% of AUM. Another point to note is that we are in a bull market and deals are happening left, right, and center.
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Hi
What are the chances that the funds from sale of AMC are used to strengthen idfcfirst bank, cuz it looks most promising in the stable.
They are intiating the process to sell AMC Business now after they received some serious words/warnings and ultimatums to change the management team, they could have easily done it earlier simultaneously with getting rid of other obstacles in the path of value unlockingâŚ
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this clearly shows they were ready to waste/sacrifice a bull market which would have given the best possible valuation to AMC business, for their own regular paycheckâŚas some shareholders rightly pointed out in the concall, there seems to be a deliberate attempt/conspiracy to slow down the process of value unlocking âŚ
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From my understanding of the situation the bank will need further growth capital in 12-18 months, if IDFC sells the AMC then any funds they recieve can be invested into the bank during they reverse merger process. This is the most tax efficient use of the funds as IDFC will get extra shares for the money which can be distributed to shareholders at the time of the reverse merger. Win win situation for the bank and the holdco.
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After the Pre-AGM suggestions concall, IDFC Ltd board finally decided on the option to sell of AMC. This removes a lot of ambiguity on other options like demerging IDFC AMC, getting acquired by some other company etc.
Now the path is super straight forward & Most of the shareholders have clearly mentioned in concall what they want- AMC Sale & Merger with IDFC First Bank.
AMC Sale:
AMC Business was purchased in 2008-2009 @826 cr, if we adjust for cost inflation acquisition cost in 2021 is about 2000cr i.e No tax on sale up to 2000cr.
The expected post-tax amount from AMC Sale could be in the range of 3500 cr i.e 23rs/share
Calculations in below sheet:
Post Sale Journey:
Happy Ending:
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Return some Money to shareholders & Merger:
If the management decided to return some cash to shareholders before the merger, theyâll have to do so in the shortest possible time. The dividend is one way to pass on this cash but since it is taxable at investorsâ end many HNIs & Corporates end up paying 25-42.7% tax. on the other hand, Management has the right to approve 10% of net worth(12000cr) to buy back shares without shareholder approval i.e around 1200cr worth shares. incase they take shareholder approval, then they will be eligible to buyback with 25% of their net worth i.e 3000cr.-
Buyback & Merger:
Management was grilled by shareholders on one major point that is stock price return for the past 5 years.Open Market Buyback:
In case management decide to do an open market buyback with 3000cr [Highly unlikely], the stock price will be re-rated very close to its NAV[i.e some 96rs]. This will help many patience shareholders to exit the company with decent returns by paying 10% capital gains on indexed price & for remaining shareholders who wanted to wait for the merger, the NAV will move up from 96rs/share to 105+ Rs/ share thereby improving swap ratio. - A Tax-efficient, win-win way for IDFC stakeholders.- Shareholders waiting for exit can exit asap
- Shareholders wanting IDFC First Bank shares will have a better swap ratio [Since open market buyback will remove shares from the market at below NAV Price ]
- Management will be able to show that they have generated 20+% compounded wealth for their shareholders since demerger.
Tender Offer buyback:
In case Management decides to go with Tender offer buyback, that will give an equal opportunity for all the shareholders to exit at a predefined price and the problem with this method is- Average price of buyback will be higher for the company & shareholders who want to wait for the merger will not have decent upside left.
- Shareholders waiting to exit for the past 5 years will not be able to exit completely & should sell some in tender offer & some in the open market/ wait for the merger.
- Management will not have a provable metric for showing a wealth creation track record.
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Dividend & Merger:
Buybacks typically take 3 Months to close & only 25% of net worth can be returned. In case management feels lazy in appointing an investment bank for the buyback process and decides to go ahead with dividends, Shareholders will have to pay the tax in their respective tax brackets. This is disastrous for HNIs[35% shares]. Many institutions[48% shares] usually donât care & for small shareholders in a low tax bracket, it doesnât matter.
Inefficient method of returning cash to shareholders but, the fastest way to do so [Buyback might add 3-4 months lag]
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Buyback, Dividend & Merger:
Since Max buyback can only be 3000cr & requires shareholder approval, management can opt for 1200cr buyback[No shareholder approval] & give out a dividend of 2000+cr [11.5 Rs/share].
This is a bit in-efficient than the buyback method, but shareholders will receive cash as fast as the Dividend method.
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Merger without returning cash:
IDFC First Bank is like a toddler at the moment, It has 25%+ growth ambition in their retail business but their ROE of <5% clearly will not support their growth, so for the past 4 years they have been growing at 25%+ Retail AUM by reducing their corporate & Infra loan book now since the retail has already inched up to 70% of the book, itâs high time for them to have solid equity capital to grow. This requires more T1+T2 capital so, raising funds through fresh equity or long-term debt is the only way for them to boost CAR and grow. Since their balance sheet is already stretched at 8:1 it makes sense for them to raise equity- In fact thatâs a more sensible way to grow at the moment.
Since IDFC Ltd is the father of IDFC First Bank & since IDFC FHC the entity which holds AMC & IDFC First Bank shares is going to receive the cash from the AMC sale, instead of moving the Cash from IDFC FHC to IDFC Ltd & to IDFC Ltd shareholders will lead to double taxation so, giving the cash directly to IDFC First Bank makes more sense in terms of tax efficiency.
This scenario [Sale + Merger] is simulated in my earlier post in the forum:
One can plug in the respective swap ratios & sale numbers. Highly likely that the discount rate will be <5%.
This is perhaps the most desired outcome
- long term IDFC Ltd shareholders who wish to take get IDFC First Bank shares will have a better swap ratio.
- IDFC Ltd Management will have Proof of wealth creation- Once the swap ratio is finalized IDFC Ltd will anyways get rerated and start trading close to that ratio.
- IDFC Ltd shareholders willing to exit can exit in the open market once the ratio is announced & price is rerated.
- IDFC First Bank Shareholders will get the growth capital it needs at probably 2x P/B + some benefit in merger discount thereby Book value increase.
- IDFC First Bank Management will have peace of mind for the next 5 years with 3500cr growth capital [15+% of their networth]
Not So Happy Ending:
There are thin chances that Merger option might fail between IDFC Ltd & IDFC First Bank due to disagreement in merger swap ratio between the companies or foundation disposal issues [Super low chances]
- Return cash to shareholders, Sell IDFC First Bank stake & Liquidation:
Returning money to shareholders can be through the buyback & dividend explained above. IDFC First Bank stake sale will be through a tender process where IDFC FHC will be liable to pay 10% capital gains tax on the indexed cost i.e Post-tax of 10kcr.
Final closure will open offer by some NBFC to acquire IDFC Ltd and merger with themselves for the cash held or liquidation etc .
IDFC Ltd shareholders might get their final exit at 55-65rs based on AMC sale funds usage.
This path is highly unlikely to happen, in the worst case IDFC Ltd shareholders will have this as exit value.
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This option is on the table until the sale of the AMC is agreed, if some NBFC comes next week and makes an offer for say Rs 100-110 the board will be obligated to consider it and put it to shareholders.
BTW the indexed cost of the AMC is Rs 2,500cr, Mr Kakar had mentioned this in the Feb 2021 call and there is also Rs 400cr of cash+liquid investments held by the Company.
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These 400cr investment will be counted in the AMC networth, AMC business is a 40% ROE business with hardly 500cr networth.
In the above calculations sale value is estimated at 4000+cr, This is inclusive of the AMC Networth. So, it shouldnât be double counted.
AMCâs are usually valued on a PE basis or as a % of AUM and not on book value or networth. The AMC is on course to post a 200cr PAT in FY22 if we annunalize the first quarters numbers. So if you take a 25-30x multiple on that then you get a 5000-6000cr equity value and for the final enterprise value you will need to add the cash as well.
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Idfc amc is primarily debt fund house. With some equity AUM. You get high multiples for high equity aum.
Secondly, when sebi is giving out amc licenses easily why buy? Zerodha, white oak have been given licenses .groww bought out india bulls. RJ and HELIOS have also applied for MF licenses. Thereâs many more in queue.
Thirdly Blackstone had bid for L&T Mf business and sebi did nothing for almost 1 year. Now it seems HSBC IS buying it. Delays by SEBI cause Buyers to loose interest
Unless SEBI allows a new category of FIIs like PE funds to become AMC sponsors ther wonât be a competition to buy. Valuations will not dramatically improve.
While I am optimistic that idfc will get a good valuation for its AMC business itâs not a dead certain event.
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Multiples being discussed above are already at a 30-45% discount to listed peers; secondly yes IDFC has a much lower propotion of equity AUM as compared to peers but their Liquid/ETF funds contribution is in single digits vs other fund houses where its as high as 30-40%. Liquid/ETF funds pay fees that are in single basis points and IDFC has stayed away from this category.
A lot of the analysis ignores the high quality debt franchisee that IDFC has built over the last few years mainly through performance and also as they were only one of two debt fund houses with no defaults in any of their schemes. Ask any financial planner and they all speak very highy of the IDFC debt/income fund schemes; this is a 80,000cr+ high quality sticky corpus.
End of the day any valuation will be based on the underlying fundamentals of the business and a business growing 30% YOY with 40%+ ROEâs and 40% Net Margins with low capital requirements can easily fetch a 30x multiple in todays market where the index itself is trading at 25-30x.
Interestingly this article too is quoting industry sources suggesting valuations of 6-7,000cr which is around this ballpark multiple- IDFC board okays proposal to divest MF business - The Economic Times
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If I go by the valuations u mentioned on a Price to AUM basis it comes out as 0.12 net of cash. Even takng a 50% discount to this gives IDFC AMC a valuation of 10k crs.
Why IDFCF is not interested is a speculatn at most. Every co. & mgmt hv thr considerations on how to go abt setting up thr business.
While regulatory delay/concerns remain, the AMC business can fetch 5000-7000 crs. reasonably and I am affirmative with the article.
Disclosure : - Invested.
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:
- 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
- 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
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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 = 66.39Final 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]:
- 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 |
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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 thatValuation & 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 |
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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 |
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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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Is it possible, that all the cash goes to Idfcfirst, and in return:
A. idfcfirst pays back the shareholders of IDFC Ltd on a future date in cash. Or
B. Pays them immediately but in form of shares of idfcfirst bank, which they are free to hold or sell. In that way, individual shareholder will have the freedom.
Because Idfcfirst needs the cash. Itâs paying 8.6% interest on CPs which needs to go down asap. Or, in the Diwali season this cash can be put to great use at 14%
Paying is future date will definately not happen.
Banks by nature are liability gathering machines ( deposits+borrowings). Equity capital is required just to support the balance sheet based on Basel 3 norms. Think of it this way, IDFC First can have 10lakcr Balance sheet without any equity if we donât have RWA norms.
Replacing high cost debt has nothing to do with equity capital. That said, equity capital is required for them to expand and grow.
The post tries to identify the most value accretive way for IDFC Ltd shareholders to realise the underlying value.
Option 3 & 4 are more tax efficient options, obviously option 4 adds long term value by the way of equity infusion into bank but at what cost is the question.
In todayâs prices(where IDFC Ltd is priced based on the fear of value erosion), it simply doesnât make sense. If the holdco discount reduces and if IDFC & IDFC FIRST bank shares trade at 1.3:1 ratio Or if he the valuer add fairness in opinion & give a better swap ratio >=1.5 then option-4 will start to make sense.
Option-3 is also good in its own sense, shareholders willing to exit IDFC Ltd will exit now, thereby reducing the selling pressure on IDFC first bank post merger- that can help the bank is having better valuation for subsequent fundraise. On top of it, it is also increasing the book value by around 10%.
At the end of the day, all it boils down to is- how much do you want to leave on th table for bank shareholders & the obligation of IDFC Ltd management to maximize shareholder value.
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@manikya_saiteja_gund : - Nice work done. Bt the issue in this arbitrage play has been pure lethargy, more than nythng else, on mgmtâs part. It was clear that the unwinding & distribution is going to take up effort which the mgmt didnât seem to be inclined to take up proactively. They were always under the guise of sm excuse or the another.
BTW, have u shared ur analysis with the co over the mail? They always ask for shareholders suggestions so why not send across this comprehensive work & see wat they say?
Disc :- Invested in IDFC from lower levels.
Any one attended todayâs Agm? Any thing new info in Agm?
Vinod Rai gone
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That was a great analysis.
Can you please clarify on the Summation method a bit - are we not assuming here that the value of AMC business is zero while doing this calculation i.e. CMP of 56 has an embedded value of the AMC business also while the comparison is being done with only IDFCâs stake in IDFCFB. So, would it not be right to assign a notional value for the AMC business and deduct it from the Mkt price?