IDFC Ltd (IDFC)

CMP: | 28 Target: | 42 (50%) Target Period: 12 BUY

months months August 13, 2020

Upside potential led by value unlocking

In 2014, IDFC Ltd received a license to set up a universal bank – IDFC Bank.
To strengthen retail franchise, IDFC Bank, Capital First Ltd engaged in a

I-direct Instinct
merger to form IDFC First Bank in December 2018. Currently, IDFC Ltd holds
40% stake in IDFC First Bank. Apart from banking, IDFC Ltd owns a Mutual Particulars
Fund (100% owned). Its AUM stands at | 103893 crore of which equity AUM Am o u n t
– | 29609 crore as of March 2020). Ma rke t C a pita lisa tio n |4430 cro re
IDFC First Bank has been able to continue its restructuring plan increasing Ne two rth |8321 cro re
the granularity of balance sheet with retail now forming ~55% of advances. 52 we e k H /L 41/13
Continued focused build-up of CASA has increased its proportion to E quity ca pita l | 1596 cro re
upwards of 30%. Prudent provisioning and recent capital raising of | 2000
F a ce va lue |10
crore provides cushion from any hiccups in asset quality. Healthy growth in
the AMC business with strong inflow in debt schemes aided by consistent P ro mo te r (% ) 0
performance bodes well for the future earnings. D II H o lding (% ) 9.24

IDFC Ltd, as a promoter, holds 40% stake in IDFC First Bank with a lock-in F II H o lding (% ) 31.34
period of five years, which is ending as of September 2020. As per their O the rs 59.42
licence, the promoter has to bring down the stake to 15% in the bank within
ess

Key Highlights
15 years from 2014. An internal committee constituted by RBI to suggest
 IDFC First Bank (40% stake)
future course for holding companies is scheduled to submit its report in continues to restructure balance
September 2020. IDFC Ltd may seek to collapse the current holding sheet thereby improving
company structure, if allowed by regulators whereby reverse merger into earnings

ICICI Securities – Retail Equity Research

bank will entail current IDFC Ltd shareholders to receive IDFC First bank  Gradual uptick in AUM based on
shares and for AMC - cash on the expectation of same being sold off fully. If consistent performance bodes
well for AMC business
the above doesn’t materialise, then selling 25% stake to reach 15% in bank
is likely to bring down holding company discount as majority valuation of  Lock-in of promoter stake in
bank ends in September 2020;
IDFC ltd will be driven by it holdings in AMC. In both situations we believe post which value unlocking to
existing shareholders of IDFC Ltd to benefit but may need patience as the lead to upside potential
value unlocking may take sometime.  Assign BUY with target price of
| 42 per share
Valuation & Outlook
Post the lock-in ends in September 2020, IDFC Ltd (promoter) can bring
down its stake to 15% as required by the current guidelines or collapse the
current structure of holding company, if permitted by the internal committee
Report. Also, sale of IDFC bank stake and realisation of IDFC AMC true value
can also result in value unlocking. Thus, we believe in future course, the Research Analyst
holding company discount may reduce and one-time sale proceeds adds to Kajal Gandhi
net worth. Valuing the AMC business conservatively at 5% of AUM and kajal.gandhi@icicisecurities.com
providing multiple of 1x to FY22E ABV for IDFC bank for 15% stake held, we
Vishal Narnolia
arrive at a target price of | 42/share in Exhibit 2. Risk to our call will be non-
vishal.narnolia@icicisecurities.com
execution of 25% stake sale in bank holding/ AMC valuations decline
significantly. Yash Batra
yash.batra@icicisecurities.com
Exhibit 1: In case of sale of 25% stake in IDFC First Bank
H o ld in g B as is S take Mcap V alu e
ID F C F irst B a nk 1x F Y22E AB V 15% 17811.0 2671.7
ID F C AMC 5% o f AU M 100% 5150.0 5150.0
7821.7
H o ld C o disco unt 64%
V alu e p o s t D is co u n t 2815.8
P ro ce e ds fro m 25% sta ke sa le 3900.0
ID F C L im ited 6715.8
V alu e p er s h are 42.1
Source: Company, ICICI Direct Research
 I-direct Instinct | IDFC Ltd ICICI Direct Research

Exhibit 2: Current Status at CMP of | 28

H o ld in g B as is S take Mcap V alu e
ID F C F irst B a nk 1x F Y22E AB V 40% 17811.0 7124.4
ID F C AMC 5% of AU M 100% 5150.0 5150.0
12274.4
H old C o discount 64%
ID F C L im ited 4374.0
Source: Company, ICICI Direct Research

Exhibit 3: Key Financials (Consolidated)

F Y17 F Y18 F Y19 F Y20
NII (|crore ) 16.3 9.2 17.6
Tota l R e ve nue (|crore ) 10392.5 670.1 340.7 355.5
Tota l C osts (|crore ) 8610.6 425.2 373.2 284.5
Ne t profit (|crore ) 699.1 779.7 -552.6 -976.5
E P S (|) 4.4 5.5 -5.2 -6.2
Ne tworth (|crore ) 10819.9 11276.0 10384.8 8320.7
Tota l Asse ts (|crore ) 117640.9 15602.3 10557.9 8569.1
B V pe r sha re (|) 67.8 70.6 65.1 52.1
P /E (x) 6.4 5.1 NA NA
P /B V (x) 0.4 0.4 0.4 0.5
R oE (% ) 6.5 6.9 -5.3 -11.7
R oA (% ) 0.6 5.0 -5.2 -11.4
Source: Company, ICICI Direct Research

IDFC First Bank

Exhibit 4: Advances growth to remain healthy for FY22E
140000 127876
120000 110400 112558 111152
107656 106140 107004 104050
100000

80000

60000

40000

20000

0
Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 FY21E FY22E
Advances

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 32

 I-direct Instinct | IDFC Ltd ICICI Direct Research

Exhibit 5: Shift towards retail faster than anticipated

100% 0.0 0.0 6.3
14.4 13.5 12.3 11.0 8.7
80%
37.0 39.7 44.7 48.5 63.2 63.5
60% 56.2 62.5

40%

20% 48.6 46.8 43.1 40.5 36.8 36.5 35.1 31.2

0%
Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 FY21E FY22E

Corporate Retail Others

Source: Company, ICICI Direct Research

Exhibit 6: Robust deposit accretion; well ahead of guidance

100000 35.0 40.0
33.7 31.2
90000 31.7 35.0
80000
30.0
70000 24.1
60000 15.1 18.7 25.0
12.9
50000 20.0
40000 15.0
30000
10.0
20000
10000 5.0
0 0.0
Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 FY21E FY22E
Deposits CASA

Source: Company, ICICI Direct Research

Exhibit 7: Asset quality concerns to remain an overhang

3.5 3.1
3.0 2.8 2.8
2.7 2.6 2.6
2.4
2.5
2.0
2.0
1.3 1.4 1.2
1.5 1.2
0.9 1.0
0.9
1.0
0.5
0.5
0.0
Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 FY21E FY22E
GNPA NNPA

Source: Company, ICICI Direct Research

Exhibit 8: Margin improvement to sustain

5 4.53 4.4
4.24 4.3
4.5
3.86
4 3.43
3.5 3.03 3.01
3
2.5
2
1.5
1
0.5
0
Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 FY21E FY22E
NIM

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 33

 I-direct Instinct | IDFC Ltd ICICI Direct Research

Exhibit 9: Return ratios to improve gradually

2.0 20.0
14.4
1.5 15.0

1.0 6.7 10.0

0.5 2.3 5.0

0.7 1.5
0.0 0.2 0.0
FY19 -1.3
FY20 FY21E FY22E FY23E
-0.5 -5.0
-1.1
-1.0 -10.0
-13.1
-9.8
-1.5 -15.0
ROA ROE

Source: Company, ICICI Direct Research

IDFC AMC
Exhibit 10: Healthy growth in AUM (| crore)
F Y17 F Y18 F Y19 F Y20
E quity AU M 13773 19943 21995 29609
D e bt AU M 35124 37628 35756 63698
L iquid AU M 11992 12348 11496 10586
Tota l AU M 60636 69919 69248 103893

R e ve nue 310 277 306.1

% of AU M 0.51% 0.40% 0.29%
OPEX 213 210.4 198.7
P AT 97 54 43.7 79.4
% of AU M 0.16% 0.06% 0.08%
Source: Company, ICICI Direct Research

Exhibit 11: Price Chart

80 14000
70 12000
60 10000
50
8000
40
6000
30
20 4000
10 2000
0 0
Aug-17

Aug-18

Aug-19

Aug-20
Feb-18

Feb-19

Feb-20

IDFC Ltd Nifty Index

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 34

 I-direct Instinct | IDFC Ltd ICICI Direct Research

RATING RATIONALE
ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks
according to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and
Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts'
valuation for a stock
Buy: >15%
Hold: -5% to 15%;
Reduce: -15% to -5%;
Sell: <-15%

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICI Direct Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

ICICI Securities | Retail Research 35

 I-direct Instinct | IDFC Ltd ICICI Direct Research

RATING CERTIFICATION
ANALYST RATIONALE
We /I, Kajal Gandhi, CA, Vishal Narnolia, MBA and Yash Batra, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this
ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the
stocks according to their notional target price vs. current market price and then categorises them as Strong Buy,
specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in
the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.
Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined
as the analysts'
Terms valuation
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ICICI Securities | Retail Research 37