Grama Vidiyal deal not much for IDFC Bank

Analysts say the bank won't gain significant benefits from acquisition of the MFI

In a first of its kind, IDFC Bank acquired a micro finance institution (MFI), Grama Vidiyal, based in south India. After the news broke, the IDFC Bank scrip moved up eight per cent on Tuesday. But, analysts feel the reaction is more on sentiments and they don’t expect further re-rating due to this transaction, as finer details of the deal are yet to be revealed. What is known is that the acquired entity is small in size and the acquisition in unlikely to move the needle for IDFC Bank.

Grama Vidiyal operates on an asset base of Rs 1,500 crore, nearly three per cent of IDFC Bank’s total advances of Rs 46,599 crore as on March 31. As MFI caters to loans not more than Rs 100,000, it might not meaningfully boost IDFC Bank’s asset base growth. With an income of Rs 194 crore and net profit of Rs 18.3 crore in FY15, the financials, too, are small. IDFC Bank’s total income stood at Rs 4,052 crore and net profit at Rs 467 crore in FY16. The same is the case with deposit base. IDFC Bank’s deposits as on March 31, stood at Rs 8,219 crore and compared to even against some of the regional players such as City Union Bank and South Indian Bank, it has a long way to go.

While the MFI has presence across seven states with a 1.2-million customer base, there is also a lack of clarity on how much has IDFC Bank paid for this acquisition. A high figure would certainly disappoint the Street.

  With this background, analysts feel it would be premature to contemplate the likely benefit of acquisition to IDFC Bank. However, apart from the customer base and reach, there are some other benefits such as exposure to priority-sector loans (PSL) that will accrue to IDFC Bank.

“IDFC Bank has always wanted to increase its rural penetration. But until now, it has been a laggard on PSL. The acquisition will help overcome this shortfall," says an analysts with a domestic brokerage. While this is a significant departure from the common practice of banks lending to MFIs to meet the PSL limits, analysts believe the strategy of diversification is good in the long run. “IDFC Bank is still a new kid on the block and it’s good that it experiments with different strategies,” says another analyst.

For now, unless IDFC Bank’s management has some aces up its sleeve, the Street is unlikely to get surprised. However, any move to simplify the shareholding structure of the bank should help improve sentiments.

According to Bloomberg, 12 out of 15 analysts tracking IDFC Bank’s stock have a ‘buy’ recommendation with a target price of Rs 63.