IDFC First – Stock Analysis

IDFC First bank was formed by the merger of the erstwhile IDFC bank and erstwhile Capital First. The acquisition was completed on the 18^th of December 2018. IDFC acquired the banking license from RBI in the year 2015 and has been expanding its operations ever since. Capital First Ltd. is a financial institution specializing in providing debt financing to self-employed entrepreneurs, MSMEs and consumers in India. The two entities merged to create formidable synergies and formed IDFC First bank. The management of the bank is now headed by Mr Vaidyanathan, MD and CEO of IDFC bank.

What is Good?

The bank’s merger with Capital First has added immense value. Capital First brings forward a loan book with good asset quality, vast retail presence and a huge diversified customer base. The merger will also help IDFC First bank to expand its retail network and improve its CASA.IDFC first has a very healthy Capital Adequacy Ratio (CAR) of over 16.5%. Its liquidity position is also at a comfortable 123% (LCR).Coming to the technologies, the bank has integrated the technologies of both the companies seamlessly as they are both new age companies with similar technology infrastructure. 

Management Analysis-

The management of IDFC First bank will be headed by Mr Vaidyanathan, MD and CEO of IDFC First bank. Mr. Vaidyanathan has an extensive experience in the industry and has had a very successful run. He is known to have built the retail banking business of ICICI since its inception. He also has a wonderful track record with Capital First, building its retail segment. 

The management seems to be confident and focused on what they want to achieve within the next couple of years. Their main focus currently is to increase their retail presence and improve their CASA eventually reducing their cost of funds. The management is also engaging in aggressively providing for their bad loans to clean up their balance sheet.

Management score: 9/10

Industry Analysis- 

India is one of the fastest growing economies in the world. It has overtaken France to become the 6th largest economy in the world and is expected to soon overtake even the United Kingdom. Such big numbers and such a fast growth rate is extremely good news for the banking industry in India. There is huge opportunity and scope for growth. India is on the cusp of digitisation. Digital is the buzz word today, and a major push is from the government side as well. Schemes like Jan Dhan proved to be very encouraging for the banks in India. On the other hand, banks have suffered a lot in the recent past due to increasing level of NPAs. The major reason for NPAs are due to disbursement of corporate and wholesale loans. This is one reason why every bank is now aiming to increase its retail loan books to a large extent. This will help them generate higher yields and also diversify their assets.

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Industry score: 9/10

Business analysis-

IDFC bank originally started as Infrastructure Development Finance Company (IDFC) in the year 1997 focussing primarily on financing capital for private sector infrastructure development. The company received a banking license in the year 2014 and the erstwhile IDFC Bank was created.The bank diversified from being a predominantly infrastructure financier to wholesale banking operations. A large portion (90%) of the bank was wholesale, so the company swiftly put together a strategy to increase its retail presence. Retail required specialised skills for the market place, seasoning, and scale for profitability, the bank was looking for a retail lending partner who already had scale, profitability and specialized skills, to merge with.Capital first, on the other hand provided financing to select segments that are traditionally underserved by the existing financing system. It emerged as a Specialized Player in financing MSMEs by offering different products for their various financing needs. They had a very strong retail presence, a diversified loan book and high asset quality. The two entities merged to form IDFC First bank forming strong synergies. IDFC First bank now is on the road to increasing its retail presence. The merger has boosted its retail market from just 13% before the merger to 35% after.  

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Business score: 9/10

Valuation-

• The valuation was done by using the adjusted book value method.
• The correct multiple was estimated by using the PB ratios of similar peers. Similar peers are those banks which are similar in terms of ROA and CASA ratios. Fair value brought forward from IDFC Bank was estimated. 
• Capital First’s Fair value was estimated using the PB ratio of Bajaj Finance and discounting it by 50% (Bajaj Finance has a huge reputation and commands premium). 
• The final fair value was figured out by adding the value brought forward by both the entities.  

Valuation: 7/10

Disclaimer- The article is for educational purpose only. Nothing in this article should be interpreted as investing advice.