IDFC First Bank’s Target Price
In October 2018, I have published a story about IDFC First Bank and came up with qualitative reasons to invest in bank for longer term. In that story I have also mentioned that I am going to post quantitative analysis to predict IDFC First Bank’s target price for next 3 to 5 years. Here I am, with second instalment of IDFC First Bank’s stock analysis, it has been delayed due to the uncertainties brought by covid 19.
Since my last story, almost two years have passed but if we look at the stock price it hasn’t changed significantly. It has just increased from Rs. 34 to Rs. 44 which is about 30% increase in almost two years, it is good but I had expected even better growth, but it should be noted that during last year banking sector went into some unprecedented stress due to covid 19, though in last few months banking sector have also recovered quite well.
Now lets deep dive into the analysis to come up with the target price in 2023 (the year till bank has given guidance). If we just look at the growth in stock price for last two years, things may not be looking very good but fundamentally something amazing has happened in last couple of years, bank management has created a very strong foundation and it will definitely help bank growing much faster in future. We need to deep dive into bank’s financial to understand the strong foundation I am talking about.
To start with let’s see where does bank stands with respect to the guidance which they have shared with the investors at the time of merger.
Looking at the above analysis, it is pretty clear that bank is doing excellent with respect to their’s guidance, in fact they are doing better in many of the aspects. Based on the bank’s growth in last two years, I have come up with my own prediction for December 2023 (last column in above sheet) which indicates bank should be doing better compare to its own guidance. Now let’s do simple math to predict Bank’s profit in 2023.
It is difficult to predict the exact price but I think it will be trading around P/E of 30 in 2023 and with above numbers, market capital should be around 70000 crore which is almost 2.8 times of current market capital.
Based on the above analysis, I believe IDFC First Bank would be trading around Rs. 115 –130 in 2023.
Okay so if everything looks good, what is the catch here? Is there some risk involved in this investment. I personally feel that only risk is Bank’s wholesale loan book which also includes infrastructural assets. There are possibilities of some of these loans going for provisioning, so one need to have a closer watch at this book. Hypothetically let’s assume that 10% of wholesale book goes for provisioning in next three years which is around 4000 crore, I think even if that happens bank should be able to come out of this given their reasonable capital adequacy ratio and profit they are going to earn from their retail assets, so still after 3 years bank’s profit should be around what I have predicted above. There could be some concerns around retail loans going bad due to covid 19 as well, but I believe it will not be that bad and bank’s current covid provisioning should be sufficient to take care of that. An another risk could be that covid situation goes out of control due to the new strains and triggering more lockdowns but I really hope that it wouldn’t happen :)
Disclaimer: I am not a professional stock analyst, I have done above analysis out of my personal interest and these are my personal predictions, please do you own due diligence before investing.