IDFC First Bank Limited

This is a different line of discussion, focussed on whether the Bank is a good investment or not.

On this front, your concern on ROE is valid. It is the rate at which equity is compounding, and a company which compounds equity at 10, how will it create wealth. And you have explained very well, compliments.

I had and have the same concern. In the heat of this discussion to debate here with facts, I went and compared NIFTY vs this Bank from the date of merger. IDFCFB share appreciation has been 100%, against NIFTY Private Bank which has delivered 66-67%. And meanwhile NIFTY Private Banks ROE would have compounded by atleast 15%-17%, since all good pvt sector banks post good ROE.

So backtesting of this ROE theory fails. In other words if we had applied this theory on Dec 18 on merger date, and not bought this stock, and bought bank pvt nifty, we would have lost out on the IDFC FIRST appreciation.

So I spoke to a two junior analysts about this. He said the P/B has increased even though BV ROE has not added to book value. He said P/B has been about 1.7 to 1.9, and the management has used the high currency to quickly raise capital and increase BVPS.

So raising capital at 1.8X BPPS repeatedly over last 3 years has increased BVPS, even though bank is not making good ROE. I bitterly complained that they are diluting again and again, what I learnt from the conversation is that diluting is actually good if raised at premium to book. He also said EPS comes down, so if they valued by P/E then it is not good, but since banks are valued by p/B then it is actually a good thing.

Net net they are making up for lack of ROE with selling shares at premium to book.

I then asked them why investors are valuing IDFCFB like this (remember I too say this bank is valued not on conventional metrics, there is a management premium), he said there are many factors like management quality, direction, smell, tech, (one guy said even trivial things like their own experience was so good that he got a good impression)… things like that.

Now this valuation is not academic, they have actually used the currency to sell the shares to new investors at premium again and again. Net net not only they had bad roe, bad loans etc. etc. somehow they got investors to give them 9200 cr in the last 3 years (3000 in 21, 3000 in 23 and 3200 in 24, at 57, 90 and 80 respectively).

So while we may curse management (me included) for even with a bad roe, atleast they have been able to maintain an image, deliver on core operating profits, sell the story to the market and raise fresh capital. Now bad ROE is not entirely their doing they just got a very bad hand to start with. The bad hand is not the bad loans. The real bad hand is a bank not making operating profits thats the harder issue to solve it takes years to change business model.

Remember if everyone of us curse them for bad roe, no good management will join and take over a bad ROE bank. They will probably join HDFC ICICI and any of the other good names with great ROE to begin with. Builders are always attacked when the product is under construction. An ordinary driver looks great in a Ferrari, and even Michael Schumacher will look bad in an ordinary Honda City. That’s the truth.

Finally your concern is still valid… there are so many factors…, let us assume the P/B benefit is already achieved and will improve no more…if you believe they wont be able able to raise more capital at premium anymore, or “other factors ” go against us … we may have to revisit our investment thesis.

I haven’t been able to figure out the “other factors” name, quality, customer experience, direction etc, and how to value it. Federal (except until recently) for a long time was posting far more ROE about 14-15% with good clean management, but always was trading at 1.1 or so, while IDFC with wub 10 ROE commanding 1.7-1.9.

After all this analysis, even now am not sure if stock will go up or down.

ps: I reacted earlier, because someone earlier called them Fraud, lies etc. i found these words pretty unfair, they show no such traits to me. if that was so they couldnt raise equity of 10000 cr at premium and save the bank. talking of Fraud, remember what happened when Yes Bank Under Ravneet could not raise capital on time. it went into free fall. atleast this management is able to raise capital, that too at premium. Even next quarter as guided by them is going to be weak “more elevated provisions”. at this rate, we have to prepare for even harsher words. Do your pick, am not suggesting you buy or sell, i am a well wisher and made money in the past, so biased.