IDFC

September09,2015

IDFC Limited plans to launch its banking operations from Oct2015 with ~25
branches and focus on corporate and rural banking in the initial phase of its
operations.ThebankwillbestartingoperationswithanetworthofRs135bn(after
makingincrementalprovisionsofRs25bn)implyingaTierIof~16%.IDFCBankwill
getlistedinNovember2015andthecurrentsuppressedsharepriceofIDFCoffers
anattractiveopportunitytobuyintooneofthestrongemergingprivatebanks.We
value IDFC at Rs160 per share taking a holding company discount of 20% (Rs205
pershareasperourbullcasevaluation)whereinwehavevaluedIDFCBankat1.6x
FY17EABV.

NitinKumar
nitinkumar@plindia.com
+912266322236
PriteshBumb
priteshbumb@plindia.com
+912266322232
Rating
Price
TargetPrice
ImpliedUpside
Sensex
Nifty

BUY
Rs126
Rs160
27.0%
25,318
7,688

Margins to remain under pressure; FY18E to mark the trough: IDFC has been
abletomaintainitsNIMat3.2%(aidedbyTierIof~23%)evenasithasbuiltup
asizeableGSecportfolio.However,asthebankisdemergedandthenetworth
isallocatedbetweenIDFCBankandtheholdingcompany(NOFHC),TierIofthe
bank will likely fall to ~16% from ~23% currently. This, along with continuous
buildup of lowyielding investment portfolio, PSL drag and CRR requirement,
will push margins lower over the next two years. Consequently, we estimate
margins to decline by ~50bps between FY1618E and likely to improve
thereafter.

204.6
1,622.4
807.8

Cost ratios to increase until FY18E; RoA to recover to 1.4% by FY20E: We

expect IDFCs costratios to increase steadily over the next three years as it
investsintechnologyandexpandsitsbranchnetwork.WeexpectIDFCsbranch
networktoincreaseto600byFY20v/s2025tostartwith.We,thus,estimate
costincomeratiotoincreasesteadilyandstabilizeat~35%byFY20E,whilecost
toasset ratio is likely to increase to 1.2% from 0.8% currently. Hence, expect
IDFCsRoAtomoderateby43bpsoverFY1618Eandthereafterrecoverto1.4%
by FY20E. However, improving leverage will still enable RoE to maintain its
upwardtrajectoryandreachcloseto15%byFY20E.
Contd...2

(PricesasonSeptember08,2015)
Tradingdata
MarketCap.(Rsbn)
Shareso/s(m)
3MAvg.Dailyvalue(Rsm)
Majorshareholders
Promoters
Foreign
DomesticInst.
Public&Other
StockPerformance
(%)
1M
6M
Absolute
(14.7)
(29.4)
Relative
(4.4)
(15.4)
HowwedifferfromConsensus
EPS(Rs)
PL
Cons.
2016
12.3
8.4
2017
12.4
11.1

0.00%
47.41%
29.76%
22.83%
12M
(11.9)
(4.6)
%Diff.
46.3
11.2

PricePerformance(RIC:IDFC.BO,BB:IDFCIN)
(Rs)
200

KeyFinancials(Y/eMarch)

2014
27,040
6.7
10,310
31,912
18,022
11.9
(2.0)
3.1

2015
26,434
(2.2)
12,125
31,920
17,259
10.6
(10.5)
3.7

2016E
27,949
5.7
12,121
31,822
19,884
12.3
15.2
4.5

2017E
28,425
1.7
13,405
31,990
20,043
12.4
0.8
5.4

Profitability&valuation

2014

2015

2016E

2017E

Spreads/Margins(%)
RoAE(%)
RoAA(%)
P/E(x)
P/BV(x)
P/ABV(x)
Netdividendyield(%)

3.7
12.5
2.5
10.6
1.3
1.3
2.5

3.4
10.5
2.2
11.9
1.2
1.2
3.0

3.4
10.8
2.4
10.3
1.1
1.1
3.6

3.1
10.1
2.2
10.2
1.0
1.0
4.3

Netinterestincome(Rsm)
Growth(%)
Noninterestincome(Rsm)
OperatingProfit(Rsm)
PAT(Rsm)
EPS(Rs)
Growth(%)
NetDPS(Rs)

150
100
50

Source:Bloomberg

Sep15

Jul15

May15

Mar15

Jan15

Nov14

Sep14

Source:CompanyData;PLResearch

PrabhudasLilladherPvt.Ltd.and/oritsassociates(the'Firm')doesand/orseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresultinvestorsshouldbeawarethat
theFirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthereport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.

Pleaserefertoimportantdisclosuresanddisclaimersattheendofthereport

VisitUpdate

Longtermplay;neartermtriggers

IDFC

Depositbuilduptobegradual;tocomprise~32%ofbalancesheetbyFY20E:
BuildingupadepositfranchisewillbeoneofthemajorchallengesthatIDFCwill
faceasitevolvesasabank.Intensecompetitionforsavingsaccountdepositand
limitedbranchpresenceofIDFCasitplanstostartwithleanbranchnetworkwill
limit its ability to quickly rampup the savings account franchise. However, on
thepositiveside,weexpectCAtoquicklygaintractionasIDFCbenefitsfromits
closeassociationwithwholesalecustomersandeffectivelycrosssellsthewide
bouquet of products that it now has to offer. We estimate IDFCs deposit
portfoliotoaccountfor~32%oftotalbalancesheetbyFY20E,whileweestimate
CASAmixtoimproveto20.4%byFY20E.

FII ownership headroom to increase significantly post demerger: Currently

there is limited room for FII participation at the holding company level.
However, post demerger, FII ownership in IDFC Bank will decline to ~22% v/s
stipulatedlimitof49%.ThiswillgiveFIIsenoughroomtobuydirectlyintothe
bank and will also enable IDFC Bank to raise capital as and when needed
dependinguponthegrowthoutlook.

Valuation:WevalueIDFCusingSOTPmethodologyatRs92,afterapplying20%
holdingcompanydiscount.WehavefurthervaluedIDFCBankat1.6xFY17EABV
whichgivesusanoverallvalueofRs160pershareforIDFCpriortodemerger.

Exhibit1: IDFCBankDuPontanalysis:WeexpectRoAtobottomoutat1.2%inFY18E
RoAdecomposition
Interestincome

FY15

FY16E

FY17E

FY18E

FY19E

FY20E

10.059.208.878.648.578.57

Interestexpenses

6.976.716.876.776.586.35

Netinterestincome

3.072.492.001.871.992.22

Treasuryincome

1.150.060.070.070.080.09

OtherInc.fromoperations 0.791.571.551.451.391.34
Totalincome

5.014.123.623.403.463.65

Employeeexpenses

0.480.510.530.510.490.47

Otheroperatingexpenses 0.390.630.720.770.810.82
Operatingprofit

4.142.982.372.122.162.36

Tax

0.740.670.560.510.540.60

Loanlossprovisions

1.250.680.500.400.350.37

ROA

2.161.631.311.201.271.39

Source:CompanyData,PLResearch

September09,2015

IDFC

Longtermplay;neartermtriggers
IDFC plans to launch its banking operations from Oct2015, with ~15 branches in
Madhya Pradesh (spread over three districts Hoshangabad, Khandwa, and Harda)
and510branchesinDelhiandMumbai.Thebankplanstofocusoncorporateand
rural banking in the initial phase of its operations and will gradually work towards
buildingupitsretailportfoliowhichwillbethemostchallengingpiecetoexecuteas
thecompanytransformsintoafullscalebank.Thebankwillbestartingoperations
withanetworthofRs135bn(aftermakingincrementalprovisionsofRs25bn)anda
totalsharecapitalof~Rs34bnwhichimpliesabookvalueof~Rs40forIDFCBankand
TierIof~16%.
Webelievethattheimminentlistingofthebankenablinginvestors(i)todirectly
invest in thebank, and, (ii) openingup of largeFIIheadroom will act as nearterm
catalystsforstockperformance.Whileimprovementinearningsstabilityandreturn
ratioswillhelpreratethestockoverthelongerterm.
Exhibit2: IDFCstransitiontoabank:Freshshareissuanceandnetworth
IDFCtransitiontoabank

ExistingNumberofsharesofIDFC

1,593

No.ofsharestobeissuedforIDFCBankin1:1ratio,representing47%oftotalequity 1,593
Totalnumberofsharesofthebank

3,389

No.ofsharestobeheldbyNOFHC

1,796

TotalsharecapitalofIDFCBank(Rsm)

33,889

TotalnetworthofIDFCBankatstart(Rsm)

135,000

Source:CompanyData,PLResearch
Exhibit3: IDFCBankbookvaluepostincrementalprovisionofRs25bn
NetworthallocationpostincrementalprovisionofRs25bn
CurrentnetworthofIDFC

Rsm
173,209

Incrementalprovisionstobemade

25,000

Impactonnetworth,adjustingforDTAcreation

156,543

Networthallocationofabove:

ToIDFC,SubsandNOFHC

21,543

ToIDFCBank

135,000

CurrentBookvalueofIDFCBank,Rs

40

Source:CompanyData,PLResearch
Exhibit4: TentativelistingtimelineforIDFCBank
1Oct15
th

th

IDFCBanktolaunchitsoperations;Effectivedateofdemerger

10 15 Oct,2015

Recorddatefordemerger

Followingthreeweeks

IssuanceofIDFCBanksharestoallIDFCshareholdersin1:1ratio

1stweekofNov,2015

ListingofIDFCBank

Source:Company,PLResearch

September09,2015

IDFC

Exhibit5: IDFCBankbusinessverticalsWholesale&Infrabooktodominatethelending
portfoliowhileinitialfocuswillremainhighonBharatBankingandworkingcapitalloans

InfrastructureLending

WholesaleBanking

Existinglendingbook
Projectfinancingtoinfrastructure

Corporate
GovernmentInstitutions

IDFCBank
CommercialBanking

BharatBanking

Retaillending
SMELending

Rurallending

Source:Company,PLResearch
Exhibit6:

OrganisationalstructureofIDFCpostdemergerofIDFCBank

IDFCLimited

IDFCAlternatives
(100%stake)

IDFCFoundation

NOHFC
(100%Stake)

IDFCAsset
Management(75%
Stake)

IDFCBank(53%
Stake)

IDFCSecurities
(InstiBroking)
(100%Stake)

IDF
(49%Stake)

IDFCShareholders
(47%stake)

Source:Company,PLResearch

September09,2015

IDFC

ScalingupIDFCBankWholesalebankingtoremainthemainstay
Wholesale banking will remain the core of IDFC Bank even as the focus in this
segmentwillmoveawayfrominfraprojectlendingtomoreofworkingcapital/SME
loans,cashmanagement,transactionbanking,foreignexchangeandotherfeebased
services.Theprofitabilityinthissegmentwillremaincriticaltothegrowthofother
piecesvizBharatbankingandRetailoperations.Corporatebankingbusinesswillbe
headedbyAjayMahajanandwouldincludetreasury,cashmanagement,transaction
banking, government banking, midmarkets, SME, investment banking and large
corporate. The securities broking business will be held under the NOFHC as a
separatesubsidiaryandwillnotbeincludedinthecorporatebanking.Thecompany
alreadyhasstrongrelationshipsonthecorporatesidenotjustintheinfrastructure
sector but across the entire spectrum which gives it an advantage in building the
wholesaleloanportfolioandofferproductsandservicestothesecustomerswhichit
was earlier unable to provide. Spreads in this business are likely to remain thin as
IDFC bank builds its book on a cautious note and does business with top rated
corporates.Potentialsavingsfrominfrastructurebondissuancewillhelplimitmargin
damagetosomeextent.
Exhibit7: IDFC Bank can raise Rs7090bn of infra bonds per year which comply for
regulatorybenefit
Q1FY16 FY16E FY17E FY18E FY19E FY20E
IDFCBankLoanBook

524

579

687

818

984 1,205

LoanbookeligibleasLTInfraProjectLoans

350

375

411

448

490

539

EligibleforregulatorybenefitonInfrabonds

30%

30%

44%

58%

72%

86%

EligibleInfraLoansforPSL/CRR/SLRBenefit

105

113

181

260

353

464

107

172

247

335

441

Infrabondsthatcanberaised
Source:CompanyData,PLResearch

Nearly Rs350360bn worth of IDFCs assets is eligible to be funded by longterm

infrastructure bonds and avail benefit on SLR/CRR/PSL requirement in FY16. The
companyplanstoissue30%ofthiseligibility(maximumpermissible)i.e.~Rs100bn
with in the current fiscal itself. While, going ahead, incremental 14% of infra loan
book will be eligible per year for regulatory incentives with 100% book eligible by
FY21E. As a part of regulatory incentive, IDFC Bank can raise Rs7090bn of infra
bondseveryyear(afterFY16E)whichwouldnotbepartofNDTLcalculation.
Weestimateinfraloanbooktogrowat9%CAGRinFY16FY20Eandshareofinfra
loanstocomedownto45%inFY20Easretail,rural&wholesalebusinessgainssize.

September09,2015

IDFC

Ruralbusinesstoscaleuprapidly
IDFC bank intends to scale up the rural business (Bharat Banking) rapidly and will
increase branches in TierVI centres (where the population is less than 10,000) to
much more than the regulatory requirement of 25%. As per IDFC, this business is
likely to turn profitable early on and will make decent ROE as the amount of
investment required is significantly lower. The contribution of rural bank to the
overallbank'sprofitwillremainsmallforinitialfewyears.However,astheseloans
are qualified for PSL lending, this will help lower the drag arising from non
compliance of PSL loans, beginning FY17E. The company has hired Ravi Shankar to
driveitsruralbankingoperations.

Retailwillremainthemostdifficultpiecetoexecute
RetailoperationswillbethethirdbuildingblockasIDFCtransformsintoafullscale
bankandwillbethemostdifficultpiecetoexecute.IDFCiscautiousofopeningtoo
manybranchesandplanstoleverageontechnologytoexpanditsretailoperations.
To begin with, the company will focus largely on TierI cities and aims to build a
liabilitybasewithabulkofsavingsandcurrentaccountdeposits.Thecompanyplans
tostartwithhomeloansandfocusonaffordablehousing,whichwillbeeligiblefor
prioritysectorlendingaswell.ThebanksretailbusinesswillbeheadedbyNavalBir
Kumar.

Deposit buildup to be gradual; we estimate deposits to comprise

~32%ofbalancesheetbyFY20E
BuildingupadepositfranchisewillbeoneofthemajorchallengesthatIDFCwillface
asitevolvesasabank.Intensecompetitionforsavingsaccountdepositandlimited
branch presence of IDFC as it plans to start with lean branch network will limit its
ability to quickly rampup the savings account franchise. However, on the positive
side,weexpectCAtoquicklygaintractionasIDFCbenefitsfromitscloseassociation
with wholesale customers and effectively crosssells the wide bouquet of products
thatitnowhastooffer.WeestimateIDFCsdepositportfoliotoaccountfor~32%of
totalbalancesheetbyFY20E,whileweestimateCASAmixtoimproveto20.4%by
FY20E.

September09,2015

IDFC

Exhibit8: IDFCBank:CASAprogressionandhowitstacksup...
IDFCCASA

160

IDFCCASAshare

25%
20.4%

140

(RsBn)

20%

16.6%

120
14.6%

100

15%
10.3%

80
60

10%

6.4%

40

5%

20

FY20E

FY19E

FY18E

FY17E

0%

FY16E

Source:CompanyData,PLResearch
Exhibit9: ...againstYesBankandKotakBank
KotakCASA

YesCASA

KMBCASAshare

YesCASAshare

300

70%

250

60%
50%

(RsBn)

200

40%

150

30%

100

20%

FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

0%

FY06

FY05

10%

FY04

50

Source:CompanyData,PLResearch

Marginstoremainunderpressure;FY18Etomarkthetrough
IDFChasbeenabletomaintainitsNIMat3.2%(aidedbyTierIof~23%)evenasit
hasbuiltupsizeableGSecportfoliotocomplywithCRR/SLRandLCRrequirements.
However,asthebankisdemergedandthenetworthisallocatedbetweenIDFCBank
andtheholdingcompany(NOFHC),theTierIofthebankwilllikelyfallto~16%from
~23% currently. This, along with continuous buildup of lowyielding investment
portfolio,PSLdragfromnextfiscalandparkingmoneywithRBItowardsCRRwhichis
right now fetching ~8% investment yield, will push margins lower over next two
years.Consequently,weestimatemarginstodeclineby~50bpsbetweenFY1618E
andlikelytoimprovethereafter.

September09,2015

Exhibit10: SignificantCASAaccretiontohelplowerCostofdeposits..
YieldonAdvances
12.0%
11.0%
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%

11.0%

10.7%

10.5%

Exhibit11: ..helpingmarginstobottomoutinFY18

CostofDeposit

NIMs
2.6%

10.6%

10.6%

IDFC

2.4%
2.1%

FY16E

FY17E

FY18E

FY19E

FY20E

Source:CompanyData,PLResearch

FY16E

FY17E

2.0%

FY18E

2.1%

FY19E

FY20E

Source:CompanyData,PLResearch
Exhibit12: IDFCBankhascreatedenoughcushionofSLRrequirement

Investments

%ofB/s
36.0%

900.0
800.0

35.0%

700.0

34.0%

(RsBn)

600.0
500.0

33.0%

400.0
300.0

32.0%

200.0

31.0%

100.0
0.0

30.0%
FY16E

FY17E

FY18E

FY19E

FY20E

Source:CompanyData,PLResearch

CostratiostoincreaseuntilFY18E,butlowerthanpeers
We expect IDFCs costratios to increase steadily over the next three years as it
invests in technology and expands its branch network. We expect IDFCs branch
count to increase to 600 by FY20 v/s 2025 to start with. We, thus, estimate cost
incomeratiotoincreasesteadilyandstabilizeat~35%byFY20E,whilecosttoasset
ratioislikelytoincreaseto1.2%from0.8%currently.

September09,2015

IDFC

Exhibit13: WeexpectCostincometoconvergeforIDFCBanksimilartoYes/KMBpostinitial
yearsofoperations
KMB

Yes

IDFC

120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
Yr1

Yr2

Yr3

Yr4

Yr5

Yr6

Source:CompanyData,PLResearch
Exhibit14: Costasset ratio will remain the lowest for IDFC among peers in first years of
operationonalreadyavailableInfrabusiness
KMB

Yes

IDFC

7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Yr1

Yr2

Yr3

Yr4

Yr5

Yr6

Source:CompanyData,PLResearch

(No.ofBranches)

Exhibit15: Cushion on costs & running wholesale franchise will enable IDFC Bank to go
aggressiveonbranchaddition
800
KMB
Yes
IDFCBank
700
600
500
400
300
200
100
0
Yr1

Yr2

Yr3

Yr4

Yr5

Yr6

Yr7

Yr8

Yr9 Yr10 Yr11 Yr12

Source:CompanyData,PLResearch

September09,2015

IDFC

ReturnRatioswillholdupwellasexistinginfrabusinessprofitable
WeexpectIDFCsRoAtomoderateby43bpsoverFY1618Eandthereafterrecover
to1.4%byFY20E.However,improvingleveragewillstillenableRoEtomaintainits
upwardtrajectoryandreachcloseto15%byFY20E.
Exhibit16: ROE/ROAtrajectorytobottomoutinFY18E
ROE

ROA(RHS)

17.0%

2.3%
2.1%

15.0%

1.9%
1.7%

13.0%

1.5%

11.0%

1.3%
1.1%

9.0%

0.9%

7.0%

0.7%
0.5%

5.0%
FY15

FY16E

FY17E

FY18E

FY19E

FY20E

Source:CompanyData,PLResearch

Incrementalprovisionswillringfencetheexistingportfolio
IDFCplanstoprovide~RS25bnoverthecomingquartersasitringfencesitsbalance
sheet against any adverse asset quality shocks once it launches the banking
operations in Oct2015. The company has identified assets worth ~Rs85bn which
may show stress going forward and plans to provide incremental Rs25bn (to be
made in 2QFY16) by directly charging to special reserves, thus taking up the total
coverage to ~53% against such assets. This is based on companys conservative
assessmentwhereinitexpectslossgivendefaultonsuchstressedassetstoremain
nearly50centstoadollar.However,owingtoDTAbenefits,theresultantimpacton
networthwillbe~Rs16bn.
Going ahead, we expect credit cost to remain much lower at ~0.6% as IDFC
cautiously grows its loan book and focuses on lowrisk corporate/working capital
loans. If the economic environment improves materially there is a fair chance of
writebackfromtheexistingprovisioningcushionthatthecompanyhasbuiltwhich
thoughisnotreflectedinourestimates.

September09,2015

10

IDFC

Exhibit17: Provisioningonstressedassetstoincreaseto~53%
Contingent&specificprovisionsheldonB/s(Rsm)

20,000

Additionalprovisionstobemadeviaspecialreservefund(Rsm) 25,000
Totalcontingent&specificprovisioning(Rsm)
Totalstressedassets(Rsm)
ofwhichpowerrelated
Totalprovisioningcushiononstressedassets

45,000
85,000
>80%
53%

Source:CompanyData,PLResearch
Exhibit18: IDFC:Currentassetqualitysnapshot
GNPL,Rsm

8,107

NNPL,Rsm

5,241

GNPL(%)

1.5%

NNPL(%)
Provisioningcoverageratio(%)
Restructuredassets,Rsm
Restructuredassets(%)
Totalnetstressedassets,Rsm
Totalnetstressedassets%

1.0%
35.3%
35,680
7.0%
40,922
8.0%

Source:CompanyData,PLResearch

FIIownershipheadroomavailablewillbesignificantpostdemerger
Currently,thereislimitedroomforFIIparticipationattheholdingcompanylevel.
However, post demerger, FII ownership in IDFC Bank will decline to ~22% v/s
stipulatedlimitof49%forthefirstfiveyears,afterwhichtheFIIlimitwillbeeasedto
74%.ThiswillgiveFIIsenoughroomtobuydirectlyintothebankandwillalsoenable
IDFCBanktoraisecapitalasandwhenneededdependinguponthegrowthoutlook.
Exhibit19: FIIownershiproominIDFCBank
FIIownershipinIDFC
No.ofsharestobeheldbyFIIsinIDFCBank

47%
755.14m

FIIholdinginIDFCBankasapercentageofsharecapital

22%

FIIlimitpermissibleinIDFCBank

49%

FIIroomleftinIDFCBanktheoretically(%)

27%

PromoterownershipheldbyNOFHC
GovernmentownershipinIDFCBank

53.0%
7.7%

Totalpublicholdingpossible

39.3%

MaximumFIIroompossible(%)

17.0%

Source:CompanyData,PLResearch

September09,2015

11

IDFC

Exhibit20: FIIroomavailableinmajorprivatebanksHDFCB&ICICIBChaslimitedroom
PrivateBanks

FIIholding%

AxisBank

GDR/ADR%

TotalFIIOwnership%

44.5

3.8

48.3

HDFCB

32.5

40.5

72.9

ICICIBank

40.3

29.0

69.3

KotakMah.Bank

35.3

0.1

35.4

IndusIndBank

38.6

12.2

50.8

YesBank

44.4

44.4

FederalBank

34.4

1.9

36.3

SouthIndianBank

28.2

28.2

J&KBank

24.3

24.3

Source:CompanyData,PLResearch *holdingasofJun15end
#HDFCBFIIownershipincludesHDFCsshareholding

Valuation
We value IDFC using SOTP methodology at Rs92, after applying 20% holding
companydiscount.WehavefurthervaluedIDFCBankat1.6xFY17EABVwhichgives
usanoverallvalueofRs160pershareforIDFCpriortodemerger.
Exhibit21: IDFCBankwilladdsignificantvaluetoIDFClimitedaswevaluebankat1.6xinbasecase
Valuationpostdemerger,Rs

Stake(%)

Valueat

BearCase

BaseCase

BullCase

1.0x

1.6x

2.5x

140.6

231.0

351.5

41.5

68.2

103.7

(i)ValueofIDFCBank
FY17EAdjustednetworthofIDFCBank

Rs140.6bn

P/ABVmultiple
ValueofIDFCBank,Rsmn
ValuepershareofIDFCBank
(ii)ValueofIDFC
(a)AMCbusinessFY17EAUMsofRs674bn

75%

5%ofAUMs

25.3

(b)IDFCAlternativesTotalAUMsofRs135.67bn

75%

10%ofAUMs

10.2

(c)ValueofIDFCSecurities

5.0

(c)ValueofNSEStake

8.0

(e)ValueofstakeheldinIDFCBank
(f)ValueofIDFat1xnetworth
(g)UnallocatednetworthatNOFHClevel/others

53%
100%

122
2
10

TotalvalueofIDFC,Rsbn

182.9

Holdingcompanydiscount

20%

ValueofIDFC,postholdingcompanydiscount,Rsbn
ValueofIDFConpersharebasispostdemerger,Rs

146.3
92

Source:CompanyData,PLResearch

September09,2015

12

IDFC

Exhibit22: WevalueIDFCatRs160pershareinourbasecase
ValueofIDFCpriortodemerger

BearCase

BaseCase

BullCase

TotalvalueofIDFC,Rsbn

182.9

182.9

182.9

Holdingcompanydiscount

40%

20%

10%

ValueofIDFConpersharebasis,Rs

69

92

103

ValueofIDFCBank,onpersharebasisRs

41

68

104

110

160

207

ValueofIDFConpersharebasispriortodemerger,Rs
Source:CompanyData,PLResearch

Exhibit23: WevalueIDFCbankat1.6xFY17EbookimplyingtargetpriceofRs68pershare
PTcalculationandupside

FairpriceEVA

66

FairpriceP/ABV

70

Averageofthetwo

68

TargetP/ABV

1.6

TargetP/E

16.6

Currentprice,Rs

60

Upside(%)

14%

Dividendyield(%)

4%

Totalreturn(%)

18%

Source:CompanyData,PLResearch
Exhibit24: IDFCBankDuPontanalysis:WeexpectRoAtobottomoutat1.2%inFY18E
RoAdecomposition
Interestincome

FY15

FY16E

FY17E

FY18E

FY19E

FY20E

10.059.208.878.648.578.57

Interestexpenses

6.976.716.876.776.586.35

Netinterestincome

3.072.492.001.871.992.22

Treasuryincome

1.150.060.070.070.080.09

OtherInc.fromoperations 0.791.571.551.451.391.34
Totalincome

5.014.123.623.403.463.65

Employeeexpenses

0.480.510.530.510.490.47

Otheroperatingexpenses 0.390.630.720.770.810.82
Operatingprofit

4.142.982.372.122.162.36

Tax

0.740.670.560.510.540.60

Loanlossprovisions

1.250.680.500.400.350.37

ROA

2.161.631.311.201.271.39

Source:CompanyData,PLResearch

September09,2015

13

IDFC

Keymanagementpersonnelandlatestappointments
Anil Baijal Nonexecutive Chairman of IDFC Bank: He retired from the Indian
Administrative Service in 2006 as Secretary, Ministry of Urban Development
Government of India. He anchored the designing and rollout of the flagship
programmeofJawaharLalNehruNationalUrbanRenewal Mission (JNNURM) with
federal grant equivalent of about Rs600bn for improvement of infrastructure and
provisionofbasicservicesinurbanareasofIndia.Mr.Baijalheldvariousimportant
assignments like Union Home Secretary, CMD Indian Airlines, CEO Prasar Bharti
Corporation,ViceChairmanDelhiDevelopmentAuthorityetc.
Vinod Rai Independent director on the board of IDFC Bank: He was the 11th
ComptrollerandAuditorGeneralofIndiaandisthecurrentchairmanofUNPanelof
externalauditors.HeiscurrentlyHonoraryAdvisortotheRailwaysandamemberof
the Railway Kaya Kalp Council. Mr. Rai also worked as Financial Services Secretary
and was director on several boards including State Bank of India, ICICI Bank, IDBI
Bank and Life Insurance Corporation of India. He holds a Masters Degree in
EconomicsfromtheUniversityofDelhi,andMastersinPublicAdministrationfrom
HarvardUniversity.
Ajay Mahajan Head Corporate and Consumer banking: He has over 23 years of
experience in the banking industry. Worked with Bank of America for 14 years,
where he last served as MD & Country Treasurer. He was also a part of founding
team of Yes Bank, as Group President of Financial Markets, Institutions and
InvestmentManagement.
Ravi Shankar Head of Bharat Bank (Rural banking business): He has about 29
years of experience across sectors including retail finance, business consulting,
advertising, automotive, aviation etc. Prior to this, he was Head of Business &
MarketingatFullertonIndiaCreditCo.Ltdwherehehelpedinbuildingaprofitable
androbustruralfinancenetwork.
Vinayak Mavinkurve Infrastructure lending: He has over two decades of
experienceinfinanceandinfrastructuresectors.HeisworkingwithIDFCsince1998.
SanjayGrewalCorporate(Noninfrastructurelending):HeiswithIDFCsince2007
and is currently working as Group head project finance. Prior to this, he was a
PrincipalInvestmentOfficerwiththeIFC.
Naval Bir Kumar Consumer Banking: He is currently the Vice Chairman of IDFC
AssetManagementCompany.
SriramanJagannathanChiefDigital&DataOfficer:PriortojoiningIDFC,hewas
workingwithAirtel,wherehespearheadedthelaunchofitsfirstmobilepayments
platform.HealsoworkedwithCitigroupforover20years,whichincludedleading
theirecommerceanddigitalbuildoutinIndiaandJapan.

September09,2015

14

IDFC

AnimeshKumarGroupheadHR&Corporateservices:Priortothis,hewasapart
of the HR leadership team in ABN AMRO/Royal Bank of Scotland (RBS) Group. He
also held positions with Marico Industries, Thomas Cook (India), YES Bank and
StandardCharteredBank(SCB).
Pavan Pal Kaushal Chief Risk Officer: He has over 30 years of experience in the
Banking&FinancialIndustry.

September09,2015

15

IDFC

IDFCBankProformaFinancials
Exhibit25: IDFCBankBalanceSheet(Rsm)
FY16E

FY17E

FY18E

FY19E

FY20E

Capital

33,889

33,889

33,889

33,889

33,889

Reserves&Surplus

101,111

109,760

120,409

134,461

153,601

Deposits

53,000

132,500

245,125

428,969

686,350

Borrowings

728,767

838,082

963,794

1,089,087

1,197,996

OtherLiab.&Prov.

42,648

51,178

60,390

71,864

86,237

Totalliabilities

959,415

1,165,408

1,423,607

1,758,270

2,158,073

Cash&Bal.withRBI

9,381

14,559

30,223

45,542

65,952

Bal.withbanks

10,163

12,618

15,716

19,735

24,496

Investments

307,499

385,688

486,405

626,269

768,538

Advances

589,833

699,542

833,154

1,002,284

1,226,796

FixedAssets

17,157

21,275

26,381

32,712

40,563

OtherAssets

25,383

31,728

31,728

31,728

31,728

Totalassets

959,415

1,165,408

1,423,607

1,758,270

2,158,073

10.2

21.5

22.2

23.5

22.7

%Growth
Source:CompanyData,PLResearch
Exhibit26: IDFCBankIncomeStatement(Rsm)

FY16E

FY17E

FY18E

FY19E

FY20E

InterestIncome

84,160

94,219

111,838

136,360

167,749

InterestExpense

61,407

72,997

87,581

104,711

124,278

NetInterestIncome

22,754

21,222

24,257

31,650

43,472

%Growth

(8.7)

(6.7)

14.3

30.5

37.4

TreasuryIncome

588

737

955

1,255

1,672

Profit&Loss

OtherInc.excTreasury

14,360

16,454

18,815

22,073

26,322

TotalIncome

37,702

38,413

44,026

54,978

71,466

EmployeesExpenses

4,658

5,636

6,650

7,847

9,260

OtherOp.Expenses

5,782

7,637

9,987

12,820

16,009

OperatingProfit

27,262

25,140

27,389

34,311

46,196

%Growth

(18.9)

(7.8)

8.9

25.3

34.6

Tax

6,100

5,958

6,662

8,644

11,699

TotalProvisions

6,229

5,280

5,184

5,497

7,199

NetProfit

14,934

13,902

15,544

20,170

27,298

%Growth

(14.7)

(6.9)

11.8

29.8

35.3

Source:CompanyData,PLResearch

September09,2015

16

IDFC

Exhibit27: IDFCBankKeyRatios
FY16E

FY17E

FY18E

FY19E

FY20E

4,800

5,384

6,140

8,269

8,880

AssetQuality
GrossNPA(Rsm)
GrossNPA(%)

0.8

0.8

0.7

0.8

0.7

NetNPA(Rsm)

2,244

2,548

3,332

4,777

4,590

NetNPA(%)

0.4

0.4

0.4

0.5

0.4

%coverageofNPA

53.3

52.7

45.7

42.2

48.3

Delinquencies(%)

0.6

0.5

0.5

0.6

0.5

RWA(Rs.mn)

923,484

1,078,076

1,263,397

1,494,219

1,795,454

TierI(%)

15.8

14.4

13.1

12.0

11.0

CapitalAdequacyRatio

TierII(%)

0.5

1.1

1.0

0.8

0.7

TotalCAR(%)

16.3

15.5

14.1

12.8

11.7

Credit/Deposit(%)

1,112.9

528.0

339.9

233.6

178.7

Invt./Deposit(%)

580.2

291.1

198.4

146.0

112.0

CASA(%)

6.4

10.3

14.6

16.6

20.4

RoaA(%)

1.6

1.3

1.2

1.3

1.4

CoreRoE(%)

9.7

10.0

10.4

12.5

15.3

DividendYield(%)

1.7

1.7

2.0

2.5

3.3

150.0

85.0

75.0

60.0

BusinessRatios

Keyassumptions
Avg.DepositGrowth(%)
Avg.CostofDeposits(%)

8.6

8.3

7.7

7.3

6.9

Avg.Adv.Growth(%)

10.5

18.6

19.1

20.3

22.4

Avg.yieldonAdvances(%)

11.0

10.7

10.5

10.6

10.6

Avg.Investment.Growth(%)

2.6

25.4

26.1

28.8

22.7

Avg.YieldonInvestment(%)

7.7

7.6

7.5

7.4

7.4

Int.Inc./Avg.assets(%)

9.2

8.9

8.6

8.6

8.6

Int.Exp./Avg.assets(%)

6.7

6.9

6.8

6.6

6.3

EarningsRatios

NIM(%)

2.6

2.1

2.0

2.1

2.4

Int.exp/Intearned(%)

73.0

77.5

78.3

76.8

74.1

Oth.Inc./Tot.Inc.(%)

39.6

44.8

44.9

42.4

39.2

Staffexp/Totalopt.exp(%)

44.6

42.5

40.0

38.0

36.6

Cost/IncomeRatio(%)

27.7

34.6

37.8

37.6

35.4

LLP/Avg.loans(bps)

65.0

60.0

55.0

50.0

55.0

BVPS(Rs)

39.8

42.4

45.5

49.7

55.3

Adj.BVPS(Rs)

38.5

41.5

44.4

48.2

53.5

Price/Adj.Bookvalue

1.6

1.4

1.4

1.2

1.1

PerShareData

EPS(Rs)

6.0

4.1

4.6

6.0

8.1

P/ERatio

10.0

14.6

13.1

10.1

7.4

%EPSGrowth

(46.7)

(31.6)

11.8

29.8

35.3

Source:CompanyData,PLResearch

September09,2015

17

IncomeStatement(Rsm)
Y/eMarch
Int.Inc./Opt.Inc.
InterestExpenses
Netinterestincome
Growth(%)
Noninterestincome
Growth(%)
Netoperatingincome
Expenditure
Employees
Otherexpenses
Depreciation
Totalexpenditure
PPP
Growth(%)
Provision
Otherincome
ExchangeGain/(Loss)
Profitbeforetax
Tax
Effectivetaxrate(%)
PAT
Growth(%)

2014

2015

77,592
50,552
27,040
6.7
10,310
13.0
37,350

2,883
2,555

5,438
31,912
9.4
6,290

25,622
7,600
29.7
18,022
(1.9)

78,668
52,233
26,434
(2.2)
12,125
17.6
38,559

3,604
3,035

6,639
31,920

8,114

23,806
6,547
27.5
17,259
(4.2)

2016E

82,332
54,383
27,949
5.7
12,121

40,069
4,504
3,743

8,247
31,822
(0.3)
4,396

27,426
7,542
27.5
19,884
15.2

2017E
90,049
61,624
28,425
1.7
13,405
10.6
41,831
5,405
4,435

9,841
31,990
0.5
4,721

27,269
7,226
26.5
20,043
0.8

BalanceSheet(Rsm)
Y/eMarch

2014

2015

Sourcesoffunds

Equity
15,163
Reserves&Surplus
135,420
Networth
150,583
Growth(%)
10.1
Loanfunds
559,150
Growth(%)

Others

MinorityInterest

DeferredTaxLiability
35,397
Total
751,630
Applicationoffunds

Netfixedassets
3,286
Advances
565,950
Growth(%)
1.5
Netcurrentassets
3,904
Investments
113,087
Growth(%)
2.8
OtherAssets
65,404
Total
751,630
Source:CompanyData,PLResearch.

16,224
161,069
177,294
17.7
564,408

38,676
786,878

3,245
582,929
3.0
4,685
129,449
14.5
66,570
786,766

2016E

2017E

16,224
175,603
191,827
8.2
631,175

42,321
871,823

16,224
190,252
206,476
7.6
729,954

46,317
989,247

3,171
629,563
8.0
5,528
165,752
28.0
67,809
871,710

3,077
679,928
8.0
6,523
230,592
39.1
69,127
989,133

IDFC

QuarterlyFinancials(Rsm)
Y/eMarch
Q2FY15

Q3FY15

Q4FY15

Q1FY16

6,490
(5.4)
4,530
11,020
23.8
1,970
9,050
20.3
2,810

6,240
2,010

32.2
4,230
(13.3)

6,620
(0.3)
3,180
9,800
14.8
1,980
7,820
7.9
1,530

6,290
2,090

33.2
4,200
(16.2)

6,410
(4.0)
4,530
10,940
12.6
2,540
8,400
0.7
3,750

4,650
830

17.8
3,820
48.1

6,270
(8.1)
840
7,110
(19.8)
2,460
4,650
(44.1)
620

4,030
1,480

36.7
2,550
(47.1)

2014

2015

2016E

2017E

126
1,516
191,204
25.4
11.9
99.3
97.8
10.6
1.3
1.3
3.1
2.5

126
1,622
204,588
26.0
10.6
109.3
106.9
11.9
1.2
1.2
3.7
3.0

126
1,622
204,588
23.5
12.3
118.2
114.8
10.3
1.1
1.1
4.5
3.6

126
1,622
204,588
20.7
12.4
127.3
122.7
10.2
1.0
1.0
5.4
4.3

AssetQuality
Y/eMarch

2014

2015

2016E

2017E

GrossNPAs(Rsm)
NetNPAs(Rsm)
GrossNPAstoGrossAdv.(%)
NetNPAstoNetAdv.(%)
NPACoverage(%)

3,396
2,342
0.6
0.4
31.0

7,074
3,891
1.2
0.7
45.0

10,805
5,619
1.7
0.9
48.0

14,834
7,417
2.2
1.1
50.0

Profitability(%)
Y/eMarch

2014

2015

2016E

2017E

NIM
3.7
RoAA
2.5
RoAE
12.5
Source:CompanyData,PLResearch.

3.4
2.2
10.5

3.4
2.4
10.8

3.1
2.2
10.1

Int.Inc./OperatingInc.
Incomefromsecuritization
InterestExpenses
NetInterestIncome
Growth
Noninterestincome
Netoperatingincome
Growth
Operatingexpenditure
PPP
Growth
Provision
ExchangeGain/(Loss)
Profitbeforetax
Tax
Prov.fordeferredtaxliability
Effectivetaxrate(%)
PAT
Growth

KeyRatios
Y/eMarch
CMP(Rs)
Eq.Shrs.O/s.(m)
MarketCap(Rsm)
MarketCaptoAUM(%)
EPS(Rs)
BookValue(Rs)
AdjustedBookValue(Rs)
P/E(x)
P/BV(x)
P/ABV(x)
DPS(Rs)
DividendYield(%)

September09,2015

18

IDFC

PrabhudasLilladherPvt.Ltd.
3rdFloor,SadhanaHouse,570,P.B.Marg,Worli,Mumbai400018,India

Tel:(9122)66322222Fax:(9122)66322209
RatingDistributionofResearchCoverage

PLsRecommendationNomenclature

47.0%

50%

%ofTotalCoverage

40.0%
40%
30%
20%

13.0%

10%
0.0%
0%
BUY

Accumulate

Reduce

BUY

Over15%OutperformancetoSensexover12months

Accumulate

OutperformancetoSensexover12months

Reduce

UnderperformancetoSensexover12months

Sell

Over15%underperformancetoSensexover12months

TradingBuy

Over10%absoluteupsidein1month

TradingSell

Over10%absolutedeclinein1month

NotRated(NR)

Nospecificcallonthestock

UnderReview(UR) :

Sell

Ratinglikelytochangeshortly

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September09,2015

RADHAKRISHNAN
SREESANKAR

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DN: c=IN, o=Personal, cn=RADHAKRISHNAN SREESANKAR,
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e69fbc1b7ba2c5315941f987f41de, postalCode=400104,
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Date: 2015.09.09 10:37:41 +05'30'

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