4 brokerage views on whether you should buy IDFC

Kolkata-based microfinance lender, Bandhan, and the Rajiv Lall-controlled and a stock exchange listed diversified financial services firm IDFC have got an in-principle approval from the Reserve Bank of India (RBI) to set up new banks in the country.

After an initial euphoria that took the stock nearly 3% higher in trade today, IDFC has trimmed some of its gains in afternoon deals.

So, should you buy the stock given the recent developments or have you missed the bus? Here is what top brokerages across the country suggest:

ICICI Securities

We had earlier identified IDFC as the biggest beneficiary amongst the evaluated NBFC applicants in terms of both increase in steady state RoE (from ~15% now to ~18%) and lowered cost of equity. Dividend tax complications around a 3-tier holding structure and a high dilution requirement for NOFHC ownership (from 100% to 40% in 3 years) will be the hurdles to value realization. However, based on a steady state multiple of 1.5x for the bank we set a target price of Rs 164 (earlier Rs138) for IDFC (Rs 22 added as per earlier indication and Rs 4 from quarterly roll). Valuations at 1.15xFY15E core BVPS are attractive and we maintain BUY. Key risk is retail infrastructure over-investment.

Prabhudas Lilladher

Our analysis of IDFC’s return ratios post 5-6 yrs of transition pain indicates that ROEs at best could move back to 11-14% levels factoring in some success on CASA mobilisation. IDFC’s valuation at 1.1x Mar-15 book is undemanding given the bank License optionality but delivering on CASA/PSL in a cost efficient manner will be very challenging given significant transition period risk. Hence any benchmarking of valuations to new generation private banks would be a stretch and valuation discount to names like ING Vysya will need to be adjusted for lower book accretion. We maintain “ACCUMULATE


Emkay Global Financial Services

Getting a bank license is positive for IDFC given that it will help IDFC to diversify from single product wholesale financing company to a more consumer centric bank. IDFC had CET 1 of 22.5% as of Q3FY14 with balance sheet leverage of just 4.6x, a positive when large part of Indian banking industry is scrambling for capital. We estimate that IDFC’s RoAs post becoming a bank will come down from 290bp to 150bp post the SLR, CRR and PSL requirements and further to 120bp including higher costs. At CMP, IDFC is quoting at 9x one-year forward rolling PER and 1.3x one-year forward rolling P/BV adjusted. At this price, the valuations are not very compelling

Morningstar India

We believe the license will give the institution three key benefits. First, it will allow IDFC to operate with lower capital adequacy requirements, thereby allowing the firm to undertake higher leverage, or grow its assets to several more times its underlying equity, resulting in higher returns to equity. Secondly, this will enable IDFC to lend to sectors other than infrastructure, ensuring that it is less vulnerable to economic cycles and downturns in one particular sector, through this diversification. Lastly, with this deposit-taking bank license, the company will be able to raise deposits from existing clients as well as from retail clients, bringing down its overall cost of funds, as it will rely less on debt funding, like it has in the past.