We are cutting our estimates by 116% in FY16e due to the one-time impact of Rs 2,500- crore provisions against stressed loans and higher opex. We have also cut FY17e by 42% to factor in lower margins and higher opex than earlier expected as the rural initiative is likely to be cost intensive.
Similarly, we expect the bank to largely rely on bulk and term deposits, while a large part of initial growth is likely to be corporate driven, which implies low margins.
Overall, while we now estimate RoA to bottom out at ~1-1.1% in FY17e (versus 1.3% earlier in FY19e), our long term outlook of RoA improving to 1.6% by FY25e remains intact.
For the lending business, we are revising our sustainable RoE to 16.9% (18.5%), leading us to revise our target multiple to 1.6x P/AB (1.8x) and giving us a value of Rs 150.
Applying a holding company discount of 20% and adding value of subsidiaries and key investments, we arrive at a revised fair value TP of Rs 163. Given that the parent started trading ex-bank from October 1 , we estimate fair value at Rs 94, based on the 53% stake held in the bank, while our pro-forma fair value estimate for IDFC Bank is Rs 65 when listed on November 6.
After the listing, FII headroom of ~14% will open up in the bank, which could support its valuations.
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