IDFC First Bank Limited

Hi Sir,
I think we need to see at what rate can they grow their Book value instead of PAT.

If we see right now in terms of PE they look to be undervalued but in terms of PB they look to be fairly valued.

If their cost to income ratio is high then the incremental money which they make for every rupee they deploy is going to be low. Eg if CI is 70% you need to spend 70 to earn 100 and if CI is 50 you need to spend 50 to earn 100.

Their PAT can grow at much faster rates but their Book value would not grow at that rate hence we should project their FY24 or FY25 Book value and then give them a multiple to see the possible price appreciation instead of PE.

Even in PB market only gives you a 3times or a 4times PB only if they see you can have a sustained earnings and growth over a long period and the requirement to dilute your shares is low and generally for small SCB this not the case hence 2times to 2.5times is the upper limit for IDFC as of today.

Considering all of the share price growth of 3x or 4x in next 3yrs is low as earnings can grow fast but book value will not.

In short instead of PAT growth we should see EPS growth or book value growth.

ROUGH calculation

1. If they are trading at 2.5x PB and price is 200 that means book value of 80.
2. For a book value of 80 they need to add 25000cr to 30000 to their share capital without diluting shares.
3. There are two way to get this money 1. PAT and 2. Raising money above book value( this process delays the increase because incrementally after dilution you add very less money)
4. So now we can calculate how much time will they take to get that money and see when can we expect 200rs share price.

Please let me know if I am missing anything

I am still learning and might be wrong
thankyou