So current book value is about 40. Merger with IDFC adds about 5% to the book value so it will go to 42. Profit is about 10-12% ROE so that gives earnings of around 4-5/year. Let’s say bank sells 30 cr shares in the market to raise capital, which will raise ~2500-2700 cr at 2 P/B. So excess of 1250-1350 cr above book value which will increase book value by another 2/share. So I see path for the bank to go to book value of around 50-55 by Dec 2024.
Buying bank via IDFC leads to ~77/share (120/1.55) valuation. So bank will be back to 1.5 P/B ratio if stock price remains stagnant till Dec 2024. If it continues to trade at 2 P/B then it can go to ~100/share which will be returns of ~30% in next 18 months (from purchase price of 77 via IDFC). I hope that bank can continue to do well in next 2-3 years which should help maintain high ROE, 2+ P/B ratio and some capital raises at that P/B ratio. This depends on merger with IDFC going through.
As bank’s capital structure gets simplified that should increase free float in the market as 40% of shares owned by IDFC will be considered free float. Rising free float and market cap will increase bank’s weightage in indexes and hence ETF. Passive investing is increasing in India which will push more money into ETF and hence IDFC First. I can see bit of this playing out already with MSCI inclusion.
Interestingly analyst covering bank at Morgan Stanley has changed and that has changed their position on the stock as well. Analysts are always prone with anchoring bias but that changes with new analyst. I won’t be surprise if rating changes as Goldman too with carrot of IB fees from capital raise. Goldman analyst hasn’t updated stock rating since 7th April 2023.
I am expecting 15-18% lumpy returns at least for next 3-5 years.
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