IDFC has underperformed the Bankex by 25-27% over the past 12 months and although its valuations look reasonable at 1.25x FY17F book (BVPS: R113), we believe it is still not the time to get in. While management has been conservative in declaring/providing for its stressed book, we believe the interest reversal impact of higher NPAs will be felt over the next two years and also front-ending of opex will likely be higher vs consensus expectations. We thus maintain our Neutral rating on IDFC with a revised TP of Rs 150.
IDFC’s transition to a bank has too many moving parts, leading to a lot of execution risk. While we/street can take comfort from the +50% cover on its ~15-16% declared stressed asset book, we believe the Street is missing the impact of income de-recognition as NPAs inch-up from just 0.7% in FY15. We believe IDFC’s spreads will be down to just ~100bp. Also, IDFC’s initial opex cost will be disproportionate to its initial branch expansion leading to a higher-than-expected opex spike over the next two years, in our view.
We value IDFC Bank at 1.5x book. We estimate ROA of 1.0-1.1% for IDFC Bank in FY17-18F which is in line with management guidance of 1% bottom ROAs. Given the above interest reversal impact and front-ended opex, 1% ROA may last longer than Street expectations into FY17-18F despite almost no specific credit costs.
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