Existing NOHFC structure can be exited. Will this trigger reduction in holding company discount for IDFC
1 Like
of courseā¦it is management stated objective too !!
The biggest issue now will be the fact that there is no large investor breathing down IDFC Ltdās management to unlock value.
The management hopefully doesnāt drag itās feet with regards to value unlocking.
They should now immediately look to sell off the AMC business asap to collapse the holding structure, once these rules are binding from RBIs end.
Rushil
Donāt worry
Enough investors with interests in IDFC are ābreathing down the managementās neckā !!
ā¦enough for them not to drag their feet or pull a fast oneā¦
2 Likes
Is the internal working group recommendation going to be the official RBI position or can the RBI over rule the current suggestions?
RBI can take its own callā¦it is an advisory at bestā¦
I think it is very likely to lead to policy changes reflected in light of KMB taking RBI to supreme court and getting 26% holding in authorized. IIB founders also wanted to increase their stake but seems like stuck in limbo.
RBI will be wary of defending additional lawsuits in the court in the light of recommendation of the committee and ad-hoc actions of the RBI so far.
I find it interesting that government was forced to come up with interest waiver after PIL to the supreme court.
I doubt there will be additional commentary from IDFC conference call. May be next thing to watch out will upcoming budget to see if NOFHC structure taxes are amended.
1 Like
Was this news spread to let the big FPI sell off today?
1 Like
Difficult to say but as per exchange filing sale was carried out from
23 Nov 2020 to 16 Dec 2020.
RBI IWGās recommendation are due to receive comments till January 12. I think Budget will be declared on 1st Feb. There could be tax change for NOFHC structure in the coming budget.
May be it will not happen in this budget but the next one. IDFC is basically play on IDFC first bank and IDFC MF. Holding company is trading at a discount and underlying businesses are doing well. It would okay if IDFC structure is maintained for longer period as long as value is being built in the underlying businesses.
I wonder if it is possible to spin-off IDFC MF as a separate entity in a tax-efficient manner. Since Government is holding chuck of IDFC, some value unlocking might get done but chances are very slim for immediate trigger.
Value of stake of IDFC First Bank crosses 9000 cr. Investment made of 800 cr for additional stake in IDFC First bank at 23 has generated returns of almost 90%.
IDFC MF AUM crossed 1.2lk cr. QnQ Growth rate for AUM was lowest among top 12 MF companiesā AUM except Franklin MF. Based 5% AUM valuation for IDFC MF, discount has been almost 60% of NAV.
Rather IDFC Ltd. had to pay those monies just to maintain their stake at 40% thus their total stake remains the same despite an additional investment of Rs 800 Cr. which would have otherwise been paid out to IDFC Ltd. shareholders.
But share price of IDFC too has doubled in the same period. So, assuming that 800 cr was the only money that company retained, hadnāt they done well by retaining and doubling that amount. And the icing on the cake will be the discount closing when the company winds up by distributing Bank shares or the proceeds of their stake. Not a bad move at all.
In fact, I still blv buying IDFC is a good way to play buying IDFC first bank shares cheaply.
Share price may have risen but that does not give the accurate picture,the absolute stake has remained the same but Rs 800 crore is gone.
Let me elaborate my point further.
They had 40% holding in the bank before the preferential issue and were mandated to maintain this stake until October 1, 2020.
They invested an additional 800 Crores in June 2020 and their stake is still at 40% after the allotment,thus Rs 800 Crores gone but no change in stake thus there is no additional benefit.
So what is the benefit that came from this other than diverting the funds that would have come as a dividend for IDFC ltd. shareholders?
Did the bank really need to raise survival capital well below book value or did they do it just because IDFC had those funds with it?
The book value of the bank also got reduced because of this.
I had written a blog post on IDFC when the price was around Rs 14-15 and agree that it is a better play than IDFC Bank given the additional stake in IDFC AMC,Just to put it in context the 800 Crores would amount to about Rs 4 per share which was almost 30% of the market cap at those prices.
2 Likes
That 800 crore went towards making a stronger bank with higher CET ratios.
The current rerating might not happen with the bank not having raised that money.
Plus 800 cr prevented stake dilution.
Otherwise one would have got it after taxation and that seems to me atleast to be inefficient for shareholders
2 Likes
Yes,The tier 1 ratios improved ,they were already good at 13% +.
The bank diluted below book at about Rs 23.2 per share which speaks about how much confidence they have in the quality of their book, this reduced the book value per share to Rs. 30.74 per share.
Which other good quality private bank raised money below their book value last year?
That money belonged to shareholders of IDFC ltd. and the company should have done a postal ballot to take its shareholders vote or at least communicated that they were doing so due to extenuating circumstances.
All stocks are up along with the market and many have outperformed IDFC Bank,in fact the CEO of the bank had to sell his shares at the worst possible time which probably made matters worse ,I agree that the recent quarterly update is encouraging and better days are ahead.
If not dividend they could have done a buyback but the funds were committed to IDFC Ltd. shareholders.
Above is the screenshot from IDFC Ltdās Feb 2020 presentation.
Yes but the most value to the shareholders comes from the bank itself and not the cash on balance sheet.
Almost all good institutions raised capital at whatever prices were available since it was a period of uncertainty.
Also at 15 rs a share if one invests for the 4 rs dividend then one gets rs 3 or so in the account and loses share value from 15 to 11.
Hence I was okay with their decision at that time.
Diluting below book is bad for the banks other shareholders who could not buy it and for IDFC itās turned out to be a good run with that money while also having reduced the downside.
Matter of opinion though. Itās done and dusted. Hoping for more value creation once RBI approves the IWG recommendations.
1 Like
Not sure I get what your point is? Yes the shareholding of the bank stayed at 40% but IDFC was issued additional shares for their 800cr investment. The number of bank shares per IDFC share went up from 1.2x to 1.4x, an increase of 16.5%. This 800cr in just six months has doubled and is now valued at 1600cr. Isnāt that a good outcome? If they would have paid 800cr as dividend most shareholders would have had to pay any where between 10-43% as tax on dividend, now when the reverse merger happens they will get the shares virtually tax free.
I believe @Krishna1 would have liked that IDFC didnāt invest 800 CR in IDFCFB but still maintained 40% ownership. Sadly IDFC FB needed to raise money during market turmoil and below its book value. Definitely bad event for existing shareholder of IDFCFB and hence IDFC.
Looking at current situation at it exists and trying to assess expected future returns and time period that those returns.
I am expecting regulatory action to allow tax neutral/efficient movement so that gap between IDFCFB and IDFCMF holdings NAV and market cap of IDFC narrows. But timeframe of this is likely to be 12-18 months.
Now NAV vs market cap discount can shrink or expand based on market perception of the changes rather than actual changes.
IDFC returns are also driven by performance of its holdings. Given current development of the bank and MF businesses, they seem to be growing at a good pace which making waiting for IDFC situation bearable. I am more bullish on the bank than the standalone MF business. Ideal outcome for the MF business would be merger to create scale.
2 Likes
-
I would love to have a look at your blog - not only for IDFC bt other detailed analysis that you must have written. I might have missed the link if you had shared earlier.
-
Ur point has been clarified by fellow valuepickrs. To summarize - whn IDFC first bank had to raise equity, IDFC the parent promoter had to invest as they had to maintain thr 40% holding till Sepā 20. Yes, thru stroke of luck and euphoric bull mkt, the price has doubled and now the investment looks good in the hindsight. However the investment wasnāt a case of misallocation but more of a regulatory requirement to meet.
The mgmt have always stated thr intention to wrap-up the holding co. However, they have 2 broad issues to address : -
-
Disposing the AMC business - this might have to be sold or placed under IDFC First bank
-
Finding the best way to dispose of the holding lot of min. 15% - The mgmt has stated that selling off such a huge chunk isnāt quick and easy. Theyāve been working on it and were awaiting the RBI Sepā30 meet guidelines as well as Dec '20 deadline.
1 Like