IDFC First Bank — Good and Safe Investment Opportunity [Part 1]

I am following IDFC Bank stock for almost last two years and I must admit that so far it hasn’t performed as per my expectations but with current price and its amalgamation with Capital First now it seems to be strong and attractive buy if investement horizon is long. I have both qualitative and quantitative reasons to believe its ability to give good returns in next five years with minimum risk on invested amount. In this part I will talk about qualitative reasons and in second part I will write about quantitative analysis with target price for next five years.

Let’s first talk about some of the important qualitative reasons:

1. The biggest benefit of IDFC Bank merger with Capital First is that new combined entity IDFC First Bank will be headed by Mr V Vaidyanathan and I think it is the single strongest reason to buy IDFC Bank with its current price. Mr V Vaidyanathan has tremendous track record of building success story in retail banking. He has done it twice, first for ICICI Bank and then for Capital First which was his own baby. In last 6 years for Capital First he has grown the total loan book from Rs.9.35 billion to Rs.295.68 billion (as of 30 June 2018), of which retail financing which grew from Rs.0.94 billion to Rs.272.2 billion (as on 30 June 2018), has grown the Market Cap from Rs.7.9 billion (as on 31 March 2012) to Rs.60.96 bn (as on 31 March 2018), reduced the NPA from 5.28% to 1.72% . These numbers look very impressive and I think that Mr V Vaidyanathan could again repeat the success story for IDFC First Bank.
2. IDFC Bank is constantly fighting with its bad loan since its inception which it got from its parent company IDFC Ltd and it is one of the biggest reason that it is not able to perform as per market’s expectation but good news is that in last 6 months they have cleaned up their loan book significantly and as per latest quartely results their Gross NPAs are down to 1.63% from 3.24% in last quarter and Net NPAs are down to 0.59% from 1.63% in last quarter which sets a good foundation for bright future. To just give an idea to you so that you can relate, HDFC Bank which is one of the most successful bank in India has Gross NPAs and Net NPAs are 1.33% and 0.40% respectively whereas ICICI Bank which is not able to perform good because it has Gross NPAs and Net NPAs are 9.30% and 4.05% respectively. Probably the another way of looking at impact of bad loan is to see interest expanded/interest earned ratio, for IDFC Bank it is consistently more than 75% since its inception whereas for HDFC Bank it is around 50%. As per latest quarter NPAs number it seems that IDFC Bank has put significant efforts in cleaning up their loan books and current NPAs are looking in much control and I think that current numbers will definetly help in improving future profit.
3. The another reason that IDFC Bank is not able to post good profits due to its high operating expenses. The bank was in its infancy stage in last few years and it has spent significant money on setup, technology and basic architecture which has increased its operating expenses. One good outcome of this exercise was that IDFC Bank is able to built a really nice infrastructure and technology setup which can be leveraged by combined entity to increase its profit. Eventually it should go down with time and it will increase overall profit margin for the IDFC First Bank.
4. After merging Capital First’s liabilities are going to be repriced, currently they are borrowing anywhere between 8.5 and 9 percentage which will come down to 7.5% and it is going to be significant saving for combined entity which will add up to their profit.

Based on above analysis I am bullish on IDFC First Bank and I have strong reasons to believe that in next 3 to 5 years it can give good returns on investment. In next part I will do quantitative analysis and based on that I will try to predict target price of this stock for next 3 to 5 years. It also seems to be a safe investement opportunity as there is no much downside from current prices until some big external negative factors come into the picture.

Thanks for reading, I will soon post second part of this topic.