ET Intelligence Group: IDFC’s banking division will be listed on bourses on November 6. The existing shareholders of the non-banking financial company will get one share of the banking entity for every share held.
While there will be uncertainty about the valuation of the banking arm in the short term, it makes sense to stay invested in the counter considering the finance company’s relatively cheaper valuations and long-term prospects of the banking division.
On Monday’s closing price of Rs 63, the stock of IDFC traded at a price-to-book value (P/BV) of one. It is possible that the banking entity upon listing may fetch a higher multiple, considering past examples. For instance, Kotak Mahindra Bank and Yes Bank, which started banking operations in 2004, traded at a price-to-book value of over three during the first three years.
Two factors, however, may lead to a slightly lower multiple for IDFC Bank in the initial period. First, it will start with a not-so-healthy asset quality. As of June 2015, stressed assets, which include non-performing and restructured assets constituted 8.4 per cent of its total assets. Most of the restructuring assets belong to power projects.
Given the uncertainty in the sector, the management has prudently provided Rs 2,500 crore for these assets. This is 50-60 per cent of the res- tructured assets, which should allay investor concern on the asset quality.
Second, IDFC Bank will start its banking operations with a loan book of Rs 53,000 crore. Given the large composition of infrastructure loans in its existing book, the bank plans to grow incremental loan book in non-infra sectors such as retail and SME.
Considering the size of the existing loan book and lack of strong retail franchise, the bank's loan growth may be subdued in the first few years.
IDFC Bank provides a good investment opportunity though returns will be lower in the first few years due to investment in technology, manpower and infrastructure. The pace at which the bank would attract retail customers and reforms in the power sector will be key triggers that investors should watch out for in future.
The foreign investor holding in the new bank is about 23 per cent, lower than its private sector peers.
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