Hold IDFC, target Rs 131: Edelweiss

Edelweiss Securities has given hold rating on IDFC with a target price of Rs 131.
IDFC’s Q4FY14 PAT of Rs 2.6 billion (down 50% QoQ and YoY) was way below estimates due to increased provisions— 5 per cent standard asset provisioning on 4.5 per cent of restructured advances to comply with regulations governing a bank, though well ahead of the stipulated time. Topping up of contingency reserves also dented PAT. Other metrics retained the same flavour with: (1) GNPA steady at 0.6 per cent; (2) growth of 6 per cent YoY to Rs 600 billion; and (3) stable NIM of 4%. In light of the onerous task of getting the bank operational by October 2015 and unfavourable macro economic climate, core business is likely to stay muted in the interim.

Though strategy for the bank has not been frozen as yet, management is optimistic as it perceives this as structurally positive. Incorporating banking business will lead to RoE dipping below 10% over the long term (till FY19). Additionally, equity infusion will lower foreign shareholding to 49% and further pressurise RoE. “We are revising our FY15/16 earnings by 8%/9% respectively factoring in lower growth and higher provisions. We maintain a hold rating with a target price of Rs 131,” the brokerage said.
In the run up to commencing banking operations, management has highlighted execution of: (1) preferential issue of equity to domestic investors by December 2014 to lower foreign ownership to sub-50%, leading to 7-8% dilution; (2) IDF-NBFC to be created to transfer operational infrastructure assets, which will ease the PSL burden; and (3) demerger to separate the bank from other IDFC entities, whereby existing shareholders will hold the bank directly, which will be a listed entity from day one.

IDFC highlighted that: (i) large part of INR90bn treasury portfolio being SLR compliant will help meet ~50% of the norm; (ii) absence of legacy branches/costs will help adequately use technology to offer differentiated service at lower costs; and (iii) possibility of selling the book and starting PSL accumulation before October 2015.

“Though banking licence is structurally positive, it entails cost & execution challenges and weak RoE (sub-10%) till FY19. With limited returns during the transition phase and valuation expected to be capped beyond 1x FY16E P/ABV, we maintain a hold rating on the stock,” the brokerage said.

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