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IDFC Bank Stock Analysis

HomeIDFC Bank Stock Analysis

Stock of the Month (August 2016) – IDFC Bank

July 19, 2016

Recommendation Price: Rs. 50.75

IDFC started in 1997 and later 1998 co. registered with RBI as NBFC (non banking financial company)&in 1999 notified as public financial Institution.In 2013 company applied for banking license and later in 2014 RBI allows in-principle approval to IDFC to set up bank for next 18 months.

As per RBI guidelines IDFC opened up a financial holding co. under which all his five subsidiaries runs, IDFC Bank, IDFC MF, IDFC Alternatives, IDFC IDF & IDFC Securities. Where 53% shares of IDFC Bank held by IDFC Financial holding company (Promoter holdings) and 43% held by shareholders of IDFC.

IDFC Bank started in oct 2015 with 23 branches all over India and on 6th November its get listed on NSE &BSE having registered office in Chennai and headquarters in Mumbai. IDFC is operating through 60 branch offices,11 ATMs & 33 Micro ATMs.

IDFC Bank nim, casa, npas

Key Financial Figures

Standalone (Rs. Cr)
Particulars Q3 FY 2016 Q4 FY 2016  H2 FY 2016
Interest earned 1,789.09 1,815.54 3,648.83
Interest expended 1,402.79 1,398.72 2,801.50
Net Interest Income 386.31 416.83 847.33
Other income 217.93 137.66 403.20
Operating expenses 215.33 294.65 510.58
Operating Profit 388.91 259.83 739.94
Provisions (other than provisions for tax) and contingencies 12.29 11.89 24.18
PBT 376.62 247.94 715.76
Tax 134.45 82.88 248.91
PAT (before Minority Interest and share of Associates) 242.17 165.06 466.85

Profitability Analysis

Standalone (%)
Particulars Q3 FY 2016 Q4 FY 2016  H2 FY 2016
Net Profit Margin Ratio 12.07 8.45 11.52
Cost to Net Income Ratio 35.64 53.14 40.83
Other Income to Net Income Ratio 36.07 24.83 32.24

Liquidity and Credit Analysis

Consolidated (%)
Particulars Q3 FY 2016 Q4 FY 2016 H2 FY 2016
Net Interest Margin Ratio (“NIM”) 2.0 2.1 2.0
Capital Adequacy Ratio 20.30 22.04 22.04
Net NPAs 1.0 2.4 2.4

INVESTMENT RATIONALE

Strong Indian GDP

India is world’s fastest growing economy with GDP standing at over $2 trillion dollar, increasing with a pace of 7.9% and is expected to reach mark of $3 trillion by 2020. This feat has attracted various foreign and institutional investors and boom in service sector, which accounts for over 50% of Indian GDP, is set to make India’s banking sector a high yielding and prominent one.

Evergreen Private Bank Sector

Private sector banks are most favored stock over the years by Indian investors. The ever-expanding reach of these banks in the vast Indian sub-continent to even mightier economy has prescribed this trust in Indian as well as foreign investors.

Stock Price and Growth Potential

Considering the fact that young IDFC Bank operates at 7th highest market cap, below Induslnd Bank, Yes Bank, and sector giants like HDFC and Axis, is available at handsome market price of Rs. 50. With high growth potential and low downside risk of the both the bank and overall sector, IDFC Bank stock could turn out to be a superb bet for investors. The banks’s Price-to-Book value at 1.30, which is significantly lower than the average (3.45) of its peers, highlights the opportunity that is up for grab.

Experienced and Reputed Management

The board of directors of IDFC Bank is lead by MD and CEO Dr. Rajiv Lall, alumni of Oxford and Columbia University, who has previously worked at World Bank, Morgan Stanley, etc. during his seven years of tenure IDFC ltd. balance sheet has recorded 30% CAGR &Profit 25% of CAGR and during his tenure he takes IDFC to as leading &biggest Infrastructure finance company with balance sheet worth more than Rs. 60000 cr.

He was instrumental in recent all-stock acquisition of Gram Vidiyal, a Tamil Nadu based Micro Finance Institution. The deal was made to acquire customer on minimal cost from south Indian region. The senior management is extracted from highly reputed firms like McKinsey, ICICI, SBI, IDBI, World Bank, Credit Suisse, Ernst and Young, etc. Delloite is acting their statutory auditor. Which is one of the recognized name in auditing &Taxation Industry .

Recently IDFC bank has awarded for best HR & talent practices by banking frontiers hence it signify good management practices.

Strategic Geographical Expansion

IDFC Bank is looking for strengthen his footholds in mass retail banking in next five years. Hence for moving further with that objective IDFC  has made a recent 100% acquisition of Gram Vidiyal (micro finance institution)through this IDFC has  concentrating his presence in states like Andhra Pradesh, Madhya Pradesh, Tripura, Tamil Nadu, Kerala, Karnataka and Maharashtra, Gujarat& Pondicherry . This acquisition will increase its customer base by 20 fold approximately as well Gram Vidiyal(MFI) has its 319 branch In those states. To target North-East region the company has tie-up with ASA microfinance with 10% stake. The gaps that will be left in medium term will be the non-service states of Uttar Pradesh, Bihar, Haryana, and Punjab.

Growth in Non Funded Income

Non-funded revenue (i.e. other income) largely constitutes of fee income such as commission and brokerage fees and client based merchant foreign exchange trade, service charges from account maintenance, transaction banking (including cash management services), syndication and placement fees, processing fees from loans and commission on non-funded products (such as letters of credit and bank guarantees) etc. Growth in other income or non-funded revenue is good for the bottom line (i.e. net profit) as income from this stream is derived without significant mobilisation of deposits and hence the cost associated with this income is relatively lower compared to interest income. Banks in developed countries derive nearly 50% of their income from these non-funded sources. 

Since last two quarters (Dec15 & Mar16) non funded income of IDFC Bank increase from Rs. 18.2 Cr. to 49.5 Cr. which is about 179.8% growth.

INVESTMENT CONCERNS

Fierce Competition

The company faces neck breaking competition from major players like HDFC, ICICI, and Kotak in long term and Yes Bank, Federal Bank in short term. This race is both in terms of quantity +quality for the market share and asset management. The company’s Q4 FY16 result showed Non-Performing Assets (NPA) standing at 2.4% which is substantial in comparison to other elder players in the game and is alarming news to existing shareholders.

Tight Monetary Policy

The rising inflation is reason behind tight monetary policy by RBI. The high rate of interest by RBI lessens the profitability of private sector banks directly and thus lags the net interest margin (NIM) of the bank. Due to growth of inflation for fourth straight month in June to 5.77% (consumer price index – based), rate cut by RBI is unlikely in coming months and increase in cost of funds is almost inevitable.

Lack of Uniqueness

There are over 15 prominent private sector banks across the nation with promising more or less same services to the customer. Besides services standard, resultant brand name, and marketing budgets, there is nothing differentiating these banks among them. So setting up a brand name among already established ones with more or less same services is going to be tough and would require large working capital.

Asset Quality: NPA Problem

Assets management and filtering good and bad assets is one of the common problems throughout the sector. With the booming economy of India, there is an increase in good loans as well as bad loans. The company faces a tough challenge of minimizing its NPA, which stands at 2.4% in Q4 FY16 from 1% in Q3 FY16, to differentiate itself from the other players of nearly equal market cap in short term.

Stringent Basel III Norms

The implementation of Basel III norms is to be covered by March 2019 and requires large capital requirements by the banks. These norms mandate strict minimum leverage ratio and liquidity requirements by the banks in order to strengthen the regulation, supervision and risk management, banks’ transparency and disclosures. The overall process would require large sum of capital to implement and thus is criticized by many.

 

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.