Analysts keep faith in growth story
Rich valuations could cap upside for the IDFC Bank stock in the near term. But an approval to merge IDFC into the bank will aid the parent’s share price
Over the course of its first year of operations IDFC Bank has launched many products in the corporate as well as retail segments, and the management has drawn up plans for scaling up the business further. While the street is not enthused by its progress so far, it remains optimistic on the prospects of IDFC Bank, which opened on October 1, 2015.
“It is a slow turnaround for IDFC Bank on most counts, be it CASA deposit build-up or branch expansion. Incrementally, it is taking the right steps but the market expected IDFC Bank to grow fast due to its sizeable balance sheet, decent profitability and the fact that it was gearing up to become a bank for a good two years,” said Nitin Kumar, financial analyst at Prabhudas Lilladher.
From the stock perspective though, they believe IDFC Bank valuations capture nearterm positives and investors with a longer horizon could consider it on dips given the growth prospects.
While the progress so far may have been slower than analysts’ expectations, IDFC Bank has stepped up brandbuilding efforts and believes increased advertisement can aid in accelerating the pace of CASA deposit build-up.
CASA deposits are current accounts and savings accounts and cost less. These help improve profitability of a bank.
After the June quarter results, IDFC Bank’s management shared a roadmap and targets. Against IDFC’s strong corporate presence, the bank aims to focus on the retail segment, which is relatively more margin accretive, and targets a retail loan book of ~18,000 crore in 2016-17. This appears aggressive given that it is four times IDFC Bank’s existing retail book.
About one-fourth of this ramp-up will come in the form of acquisitions, according to the management’s estimates. The bank recently acquired microfinance institution Grama Vidyal, which has a loan book of ~1,500 crore.
Overall, most analysts believe the bank will be able to increase its loans at a healthy pace on the back of branch additions as well as a digital distribution network.
The IDFC Bank stock, which made a new 52-week high of ~83.45 on Wednesday, closed at ~78 levels on Thursday. Both IDFC Bank and IDFC have outperformed the S&P BSE Sensex since November 6, 2015, when shares of IDFC Bank were listed on the bourses. Since then, the IDFC Bank and IDFC scrips have surged 11 per cent and 17 per cent, respectively, far ahead of Sensex returns of about six per cent.
On a combined basis though, these stocks trade at ~143, which is 11 per cent lower than their pre-demerger price of around ~160. One reason is the wide holding company discount of 40-45 per cent accorded to parent company IDFC.
“We believe that optimum valuation of the bank and more clarity on the likely merger will drive interest in IDFC’s stock, leading to contraction in the holding-company discount,” analysts at Kotak Institutional Equities wrote in a recent report.
In August, in a statement the bank said that IDFC is in discussions with regulators to explore the possibility of a merger and the timelines for the same cannot be predicted. While no formal application or move by the bank's board has been made, analysts say, whenever it happens, a merger will bring down the holding company discount for IDFC. The fact that the draft guidelines for new on-tap banking licenses require only companies not regulated by RBI to operate in a holding company structure strengthens the case of a merger, believe analysts.
While the discount makes the IDFC stock attractive, most analysts are also positive on IDFC Bank, even as they are concerned that the bank's return ratios may take a while to ramp up.
“IDFC Bank’s asset growth is likely to be strong in 2016-17 as it will acquire priority loans, but at lower margins/return on assets. Scale-up of CASA and fees will be key to a rise in the ROA,” wrote analysts at CLSA in a recent report.