IDFC First Bank, Monthly - Has been in a downward channel for 18 months and has taken channel support at 30. July has closed convincingly above June open which is quite bullish as well. August will very likely be another green candle. If it has enough in the tank for a breakout post that, it can re-test Jan '21 highs in 6 months. This scrip has extreme retail participation and has tested patience of everyone who has touched it in the last 5 years or so. Why should this time be different?

To understand, we need to go back to Jan '18 when the merger of erstwhile IDFC Bank and Capital First was announced. The promoter who everyone should know by now, courtesy social media coverage for the stock, promised a lot of things. The promoter being very savvy in self-promotion probably added to the hope. Maybe market expected things to turnaround overnight but what transpired is one misfortune after another - as profligacy in infra, power, telecom loans from the past came home to roost, along with Covid.

In the intervening 4 years though, the texture of the business has changed considerably

That’s some seriously impressive retail deposit growth (73% CAGR), the CASA ratio is now 50% which is on par with the leaders in the pvt banking space, ICICI and HDFC Bank. This has helped the bank replace wholesale deposits with relatively cheaper retail deposits. NIMs have grown from 3% to 6% and retail loan book is now substantial.

The bank has grown retail loan book considerably and has reduced infra financing (26k Cr to 7k Cr) and risky wholesale loans. Most of these are what the promoter appears to have promised in FY19 and th execution seems to have kept pace with that.

But the price has gone nowhere because all this matters for squat if you book value per share doesn’t grow and that has been the problem for IDFC First Bank. The net-worth of the bank was 18k Cr before the merger and is now at a meagre 21k Cr now. On top of this, to provide for all the troubles, the bank has had to dilute - the equity base has grown from 4800 Cr to 6300 Cr. So effectively, the BVPS has deteriorated from Rs.38 to Rs.33 during the period which explains the abysmal stock performance.

The business has spent its efforts in building a retail franchise which is not easy. It has roped in Mr. Bachchan, spent considerable sums in ads and promotions, grown from 206 branches to 641 branches and built a better CASA franchise and also better retail loan book. So the P/B I would be willing to give for Rs.33 BVPS in FY22 would be higher than the multiple I would have given in FY19 when the BVPS was Rs.38.

There’s a lot of scope for improvement in the business as well, as cost-to-income improves. There should probably be lesser negative surprises going forward, going by the provisioning done already in the past (courtesy equity dilution). The RoE should improve in the next 2-3 years which can make this trade at 2x P/B. The BVPS should grow as well with reduced provisions. So there are multiple things that can go right from here than wrong and there’s probably sufficient margin of safety at 1x P/B around Rs.33.

Risks:

1. Large equity base coupled with unprofitable growth
2. Loan book quality is an unknown unknown
3. Further equity dilutions

Disc: Built positions between Rs.30 and Rs.35 which I thought was fair value. I am a novice and don’t really understand banking well and usually avoid it, so please don’t consider this advice.

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Does anyone know what the 2.5 CR+ of other income this quarter and last represents . In prior periods, other income had never been meaningful

Attended the concall partially. They reiterated many of these points - US pricing pressure slowing, other regulated markets and emerging markets growing, Endo launches picking up etc. Spoke about moving back to their erstwhile strategy of focusing on complex / difficult to make generics as opposed to “me too” products which they had resorted to post covid to balance the over-reliance on their acute portfolio.

They will bring the gross debt down to 1000cr by this year. Arun Kumar has guided for 20% EBITDA margins by six quarters, which is where they used to be pre-covid. Essentially the business seems to have made a clean bottom and should be on the way up from here, barring any unforeseen events.

Stelis is scaling steadily but no news on Sputnik money yet. I think we as investors should write it off.