IDFC Bank – A Potential Compounder And A Blue Chip In The Making

Dr. Rajiv Lall of IDFC Bank is as blue chip as they come. He said five years back that IDFC Bank would be created. He stayed true to his word and got the license. In the meantime, he has also steered IDFC and built it into an institution known for its values and capabilities.

In a banking system facing capital adequacy issues, this bank will start off well capitalised and with stressed legacy loans from IDFC well provided for. Its starting book value will be INR 40 and starting balance sheet around INR 70,000 Crores.

His central proposition for the bank is – lowest cost to income in the sector and a new generation technology bank which will attack the urban and semi urban and rural markets with differentiated strategies around physical branches. It will start life as a wholesale bank and an online bank and spread out.

Both in terms of business quality and management quality this is an interesting proposition. They might rewrite the banking rules in what will eventually be the third largest banking system in the world after the US and China in a few years from now.

Some very simple calculations indicate that the bank might list around INR 60 ( BV of 40) and based on industry averages of np / balance sheet could be quoting at INR 240 by 2020 based on their statement that they will grow the balance sheet to INR 2 Lakh crores by 2020.

S.No	Bank	Size Of Balance Sheet	Net Profit	NP/Balance Sheet	EPS	CMP	Multiple	
1	HDFC Bank	590503.7	10215.92	1.73%	42.41	1086	25.61	
2	ICICI Bank	646129	11175	1.73%	19.8	286	14.44	
3	Yes Bank	136170	2005	1.47%	50	725	14.50	
4	Indus Ind Bank	108724	1793	1.65%	34	939	27.62	
5	DCB Bank	16080	191	1.19%	6.8	138	20.29	
6	City Union Bank	27871	395	1.42%	6.7	91	13.58	
	Average			1.53%			19.34	
								
7	IDFC Bank in 2020	200000	3500	1.75%	10.33	227.21	22	
When IDFC Bank lists, its BV will be 40. Likely to list at 1.5 x BV which is a listing price of INR 60, making it a 4X possibility in 2020								
Balance sheet number of IDFC  Bank in 2020 based on numbers given by Dr. Rajiv Lal

Of course, execution risks in a highly competitive industry are a key risk.

Look forward to views of the experts