In the last ~15 months, the stock has lost close to 30%. And yet, the long term story remains intact.
The terrain
Cells highlighted in green are those where the bank’s metrics are better than those of the median (last row). IDFC First continues to do better than many peers particularly in the deposit growth and CASA ratio while keeping the risk parameters in line.
Performance in brief
Steady growth in interest income and fees
Control on expenses
Steady increase in appropriations to reserves
Positive net profit of Rs 513 crore in FY24
Steady growth in EPS
Fueling this is the retail loan book with focus on secured products, and a well-diversified portfolio with a strong focus on risk and digital presence.
The growth drivers
The arguments put forward in my previous research note (https://www.research-lab.in/post/idfc-first-bank-poised-for-takeoff) are applicable.
The bumps
The legacy infrastructure accounts
Overall weakness in the micro finance accounts (structural in nature)
The bank took an extra provisioning of Rs 568 crore to take up total provision at Rs 1732 crore in Q2FY25.The extra provisioning was attributable to two specific lines of businesses -
Micro finance : Rs 315 crore
Legacy toll infra account : Rs 253 crore1. Micro finance accounts – SMA 1 and SMA2 accounts are fully covered now. Provision amount Rs 315 crore. However, I expect more pain to come based on the Oct '24research note from Motilal Oswal
2. Legacy toll infra account – The bank had earlier made a provision of 42% on the outstanding. Last quarter the bank took another provision of Rs 253 crore after the Government of Maharashtra stopped toll collection. The current outstanding on this account may well head to write off, unless the government makes payment of the outstanding amount.
However, this one time extra provisioning of Rs 568 crore may not be the end of the story for these two lines of businesses.The legacy infra book looks like this as of Q2FY25
The microfinance business is showing signs of stress and is likely to show up in Q3 FY25 and Q4 FY25. The outstanding book as of Sept 2024 is Rs 12,520 crore a decline of ~Rs600 crore since Sept 23
The Bank has said it is taking corrective steps to address this issue in forms of
Slowing down the disbursement volume
Holding a conservative provisioning policy
Enhancing collection efforts
Using CGFMU cover under the Credit Guarantee Scheme
MFI Sector update :
However, it would be good to bear in mind that the issue is structural and has impacted all banks with a presence in MFI. A Motilal Oswal sector update published in Oct 24 was unequivocal that the “recovery is distant” . The report flagged all unsecured products – credit cards, personal loans, business loans – for the current credit cycle. The problems range from customer overleveraging to unsavory business practices to extend credit using fake IDs.
Updated valuation
Recommendation – Buy
Assumptions
Growth rates in each stage is based on trends observed in other banks at respective maturity levels
Payout ratio for stage 1 is conservatively kept at 0 while for stage 2 is assumed at start at 2% while the steady state payout ratio is modeled after other banks
The duration of each stage is based on my judgement call
The model is disproportionately impacted by the cost of equity and payout ratio in steady state. This is the nature of dividend discount models.
Disclosure
I hold shares of IDFC First Bank
All numbers in this report are from annual and quarterly reports of banks and I have used them in good faith
I have not interacted with any of the Banks
While the story makes a clear case of buy, not all stocks are suitable for all customer profiles. Please consult with a SEBI registered investment advisor before making any decision
Interpretation of recommendation – based on current numbers the value of the stock “should be” where it shows in the model. However, this assumes the model is right and also that the market agrees with the model. Quite often this takes time.
DDM - dividend discount model
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