Raghav Behani IDFC Bank 05 May 2017

INH200004471 A Growth Investment

Company Overview: Details:

IDFC Bank is a IDFC promoted private sector bank. In 2013, IDFC Company IDFC Bank
had applied for a banking license with RBI and it got the in- Sector Banking
principal approval from RBI in 2014. The bank launched its Rating SUBSCRIBER
operations in 2015 with 23 branches on 1st October. The bank is CMP 64.8
headed by Rajiv Lall who had joined IDFC in 1997. The bank’s Market Cap Rs 22,401 Crores
aim is to leverage technology to ensure last mile delivery of Face Value Rs 10
banking services to the remote corners of the country.

Industry Overview: Valuations:

The public-sector banks in India control 70% of the banking (Consolidated)
business and are suffering from a severe crisis in asset quality.
The NPA size of some banks is larger than their market Particulars
capitalization and these banks are heavily relying on capital P/E 21.99
infusion by the Government to stay afloat. On the other hand, Div. Yield 1.14%
private banks like HDFC, Yes, Kotak Mahindra, IndusInd and RBL Price to book value 1.53
are growing at a rapid pace and keeping up with the growing EV/EBIDTA 7.52
demands of the customers. The “less-cash” economy drive by
the Government and other schemes like Jan Dhan Yojna and
Shareholding Pattern:
Direct Benefit Transfer have increased the banking penetration
in India, though much of these schemes have given the public (Key Shareholders)
sector banks more number of accounts. Kotak Mahindra
recently launched its 811 campaign which lets people open a Category 31-Mar-17
zero balance account in just five minutes! The Aadhar based Promoters 52.88%
account opening process is helping banks leverage technology FII 22.78%
DII 3.50%
to increase their banking presence. Private sector banks are
seeing a healthy growth in their CASA due to increasing number
of SME’s and employed people. There is a big scope of growth Share Price Performance:
for the private sector Indian banks considering that India’s
1m 3m 1y
biggest banks – SBI and HDFC Bank rank between 40-50 in terms
SENSEX -0.4% 5% 18.2%
of market capitalization. In the top 100 banks based on assets, IDFC Bank 10.2% 6.98% 41.26%
we don’t have any Indian bank. With a ~ 120 Crore population,
increasing levels of business and employment, digital economy
drive and a booming economy, the Indian banking space has One Year Chart:
good tailwinds to propel them in size.

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Raghav Behani IDFC Bank 05 May 2017
INH200004471 A Growth Investment

Financial Overview:

Annual figures in Rs. Crores

This was the first full financial year for the bank’s operations and thus we cannot have a year on year
comparison.

Quarterly figures in Rs. Crores

The below chart shows the number of branches the bank has:

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Raghav Behani IDFC Bank 05 May 2017
INH200004471 A Growth Investment

Quarterly Charts:

The company has managed to bring down the NPA but the ROA and NIM have done bad on a quarter
to quarter basis in FY2017. CASA ratio will increase over the next few years as it is a new bank but
what is to be noted is how fast can the bank push this ratio.

Peer Analysis:

EV/EBIDTA and Market Cap/Sales are not helpful in evaluating valuations of banks. Price to Book is a
good measure of how the market is valuing a bank’s assets. Public sector banks usually trade at a P/B
of below 0.8-1 and private banks command a P/B of > 2. IDFC Bank trades at a low P/B ratio because
of the high NPA number that it had in the beginning of FY17. P/E ratio is based on how fast the
earnings can grow. IDFC Bank has enough room for P/E to expand to ~25-27 if they can keep the NPA
levels low. If NPA increases, then the bottom line will take a dent despite the topline growing at a
healthy rate.

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Raghav Behani IDFC Bank 05 May 2017
INH200004471 A Growth Investment

The above chart is a detailed comparison between the NIM of different private sector banks. IDFC
Bank clearly has the lowest in this peer set comparison.

Being a new bank, IDFC Bank also has the lowest CASA ratio and it will try to push up this ratio at a
fast pace over the next few years. The bank will ideally target a CASA of > 25% in the foreseeable
future. RBL Bank has been pushing up its CASA Ratio at a healthy pace and is already at 22% at the
end of FY17, up from 18.6% for FY16.

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Raghav Behani IDFC Bank 05 May 2017
INH200004471 A Growth Investment

IDFC Bank also has the highest NPA ratio as on the end of FY17. The bank has drastically improved
asset quality in FY17 but there is still room for it to bring it lower. However, it is the only bank in our
comparison set that has reduced its NPA ratio in FY17.

Key Points:

- IDFC Bank has three distinct business verticals:

Vertical Segment
Commercial and Wholesale Banking Corporates, SME, Government
Bharat Banking Semi urban and rural
Personal and Business Banking Urban

- The share of infrastructure loan was 71.2% at the end of FY16 and it came down to 54% at
the end of FY17. The share of retail loans rose to 25% at the end of FY17.
- The acquisition of Grama Vidiyal has given the bank access to a wide customer base and
geographic spread.
- The customer base of the bank at the end of FY17 stood at 1.4 Million and the acquisition
rate crossed 60,000 per month in March 2017
- The NPA ratio decreased on the back of the sale of Net Rs 2,000 Crores worth of stressed
assets to Asset Reconstruction Companies in Q4FY17
- The bank has the following aims for the end of FY20:
- Increasing its customer base to 10 Million
- Increasing the share of retail loans to 50%-60% by FY20
- Increasing the branch network to 200 from the current 74 by FY20
- Doubling the fee income from FY17 levels

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Raghav Behani IDFC Bank 05 May 2017
INH200004471 A Growth Investment

The above images are from the Q4 presentation by the management. The same is available on the
bank’s website.

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Raghav Behani IDFC Bank 05 May 2017
INH200004471 A Growth Investment

The road ahead:

The above chart shows the CASA ratio improvement for Yes Bank over the last seven years. A higher
CASA ratio means lower cost of funds for the bank as the interest rates on these accounts is low. This
helps in keeping the NIM high.

The above chart correctly shows the high NIM that Yes Bank is able to sustain over the years.

For the stock price to witness significant appreciation, IDFC Bank will have to grow its balance sheet,
push up the CASA ratio, lower the NPAs, push up the NIM as it expands and tries to grow its
revenues.

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Raghav Behani IDFC Bank 05 May 2017
INH200004471 A Growth Investment

Recommendation

FOR
SUBSCRIBERS OF
RAGHAV BEHANI EQUITY RESEARCH

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Raghav Behani IDFC Bank 05 May 2017
INH200004471 A Growth Investment

Disclaimer:

This report has been prepared, approved and distributed by Raghav Behani. Raghav Behani is a SEBI registered Research
Analyst bearing certificate number: INH200004471.

The report has been prepared for the registered subscribers of Raghav Behani. This report should not be reproduced or
redistributed to any other person in any form without Raghav Behani’s prior permission. The report is purely for
information purposes and is not to be interpreted as an investment recommendation/advice. The opinions expressed in
the report are current opinions and may change time to time without any notice. Raghav Behani does not accept any
liability from the use of this document. The reader is supposed to conduct his own research before investing.

The report has been prepared based on publicly available information filed by the company to the respective stock
exchanges. While reasonable steps have been taken to present reliable data in the report so far as it relates to current and
historical information, Raghav Behani does not guarantee the accuracy or completeness of the data in the report. The
report has been prepared after carrying out research on this data and the documentary evidence of the same is available
at the place of business of Raghav Behani as per regulatory requirements.

Rating System:

Rating Expected Return Time Frame

BUY 10% + 1 Year
HOLD 0 – 10% 1 Year
SELL Negative 1 Year

Disclosures:

Disclosure
a) Whether the research analyst or research entity or his associate or his relative has any financial NO
interest in the subject company
b) whether the research analyst or relatives, have actual/beneficial ownership of one per cent. or more NO
securities of the subject company
c) whether the research analyst or his associate or his relative, has any other material conflict of NO
interest at the time of publication of the research report
d) whether it or its associates have received any compensation from the subject company in the past NO
twelve months
e) whether it or its associates have managed or co-managed public offering of securities for the subject NO
company in the past twelve months
f) whether it or its associates have received any compensation for investment banking or merchant NO
banking or brokerage services from the subject company in the past twelve months
g) whether it or its associates have received any compensation for products or services other than NO
investment banking or merchant banking or brokerage services from the subject company in the
past twelve months
h) whether it or its associates have received any compensation or other benefits from the subject NO
company or third party in connection with the research report
i) whether it or its associates have received any compensation from the subject company in the past NO
twelve months
j) whether the subject company is or was a client during twelve months preceding the date of NO
distribution of the research report
k) whether the research analyst has served as an officer, director or employee of the subject company NO
l) whether the research analyst or research entity has been engaged in market making activity for the NO
subject company

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