IDFC First Bank Limited

Best estimate scenario after 5 years:

1. Loan book is increasing at 25% per year. So loan book will be=(1+0.25)^5= 3 times the current book after 5 years. So as to maintain the statutory capital adequacy ratio, book value will be also 3 times.
2. In the near future earnings will increase faster than loan book because of operating leverage and other mentioned factors in the forum. My estimate for the earnings growth is 40%, 35%, 30%, 25%, 25%. So profit will be approximately 4 times the current profit.
3. Currently ROE is ~ 12%. Trajectory for ROE by accounting above figures: 12%, 13.44%,14.52%, 15.1%, 15.1%
4. Subsequent dilution will be at price of N times the book value. N for subsequent years will (assumed) be 2, 2.25, 2.5, 2.75 and 3.
5. Dilution required per year to maintain the statutory requirement of capital ratio is: 7.5%, 5.13%, 4.19%, 3.6%, 3.3%. So total dilution in next 5 years will be 21.62 %.
6. In conclusion, at the end of next 5 years, book value be 3 times the current book value. Dilution will 21.62%. Valuation will be 3 times book value. So price appreciation expected is =3/1.7 * 3 * (1-0.2162)= 4.1X . (Note that current price to book is 1.7)

Note: Invested and Biased