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Axis Securities Maintains Buy Call On This Private Sector Banking Stock, Sees 31% Upside

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A recent report on IDFC First bank by Axis Securities gets a "buy" call with a target price of Rs 70 per share. Considering the stock's current market price and the given target price, the brokerage claims a 31% potential upside.

 

The brokerage believes the company has all the right levers to grow profitably from hereon supported by its successful transition from infrastructure lending to building a diversified retail-focused loan book (the retail book is now 66% of the total loan book as of Q1FY23). Moreover, it has reduced its high-risk infrastructure book to 5% of the loan book in FY22 from 37% in FY18 and the management has guided that the same is expected to reduce further.

Stock Outlook & Returns

Stock Outlook & Returns

The stock is currently trading at Rs 53.70 per share, opened at Rs 54 per share. The stock's 52-week low was recorded on 22 June 2022, at Rs 28.95, and its 52-week high was recorded on 06 October 2022, at Rs 55.15. IDFC First bank has a market capitalization of Rs 33,427.59 crore.

The stock has surged by 8.92% in a week and has given 6.54% positive returns in the past 1 month. The stock gave a massive 59.26% positive return to shareholders in the past 3 months. The stock has given 11.98% positive return in the last year. It gave 45.47% during the previous three years. However, in the past 5 years, it gave 8.98% negative returns.

Strong Growth Momentum & ROA/ROE Expansion to Drive Value!
 

Strong Growth Momentum & ROA/ROE Expansion to Drive Value!

On the deposit front, IDFCFB has focused on building a granular liability franchise for the past 5 years. Consequently, Retail Deposits (Retail CASA + Retail Term Deposits) grew at a 3-Year CAGR of 73% to reach Rs 68,035 Cr in FY22. With strong service levels, attractive pricing, a strong brand, and excellent customer-first products, CASA deposits grew at 86% CAGR in the past 3 years. Consequently, the bank's CASA Ratio (%) has grown from 8.68% (in Dec'18 at the time of the merger) to an impressive 50.04% in Jun'22, enabling the bank to reduce its cost of borrowing from 13.5% in FY18 to 5.1% in FY22.

IDFCFB has demonstrated resilience by weathering the COVID-19 disruptions and has emerged with stronger asset quality, a significant deposit base, and a granular retail-focused asset book. while the credit costs were at an elevated level during the pandemic, the company has clearly come out of it with a much better credit cost of 0.9% (in Q1FY23). Despite the adverse impact of the pandemic, IDFCFB successfully implemented its de-risking strategy and increased its retail book as well as reduced its high-risk infrastructure lending book. Consequently, from FY18 to FY22, the bank's retail book and commercial finance grew by a healthy 89.4% CAGR and 77.02% CAGR respectively, whereas the infrastructure lending book degrew by 28.8% CAGR. This loan book derisking strategy aided the bank in reporting robust asset quality with GNPA/NNPA at 3.7/1.3% in FY22. "We believe IDFCFB is well-placed in the market to benefit from (a) Granular liability franchise, (b) One of the best CASA ratios in the industry, (c) Successful derisking of the loan book, (d) Pan-India geographical presence, and (e) Improving asset quality trends," the brokerage has said.

Successful implementation of loan book de-risking plan

Successful implementation of loan book de-risking plan

The bank focused on building a strong retail franchise post-merger by proactively recognizing the change in the Indian landscape, emerging risk in infrastructure financing, and the low margins in corporate banking and put together a strategy to realize its loan book with an objective to derisk, diversify, and enhance margins. This helped it achieve its derisking strategy even with the unexpected and unprecedented stress that hit the infrastructure book during the Covid-19 pandemic. "Overall, the bank reduced its Infrastructure financing portfolio from 37% (Mar'18) to 5.2% (Mar'22) of total funded assets. Moving forward, we expect the loan book to report healthy growth of 20-25% over FY23-25E with a key focus on the retail segment and a slightly stable-to-lower growth in the corporate segment," the brokerage has said.

 

Granular deposits franchise to support the cost of funds since the merger

Granular deposits franchise to support the cost of funds since the merger

Post-merger, the bank had a very low retail deposit of Rs 10,400 Cr against a loan book of Rs 104,660 Cr, resulting in a very high cost of borrowing (to the tune of 13.5% in FY18). "With the new management at the helm led by V. Vaidyanathan, the bank focused on building a strong retail deposit base with a high proportion of CASA. Consequently, the bank's cost of borrowing was reduced to 5.1% in FY22. Currently, with a strong CASA ratio of 50.04% (Q1FY23), we believe IDFCFB is in a good position to grow with a reasonably sustainable level of cost of borrowing," the brokerage has said.

Continuous ROA improvement with double-digit ROE

Continuous ROA improvement with double-digit ROE

The bank has observed significant improvement in ROA over the last four quarters with ROA going up from 0.37% in Q2FY22 to 0.97% in Q1FY23. We expect the bank to continue its journey moving forward to further augment its ROA/ROE by leveraging a) Its powerful unit economics, b) Incremental retail lending business at ROE of 18-20%, c) Improving branch productivity with normalized cost to income ratio and, and d) Scaling up its fee income from new business launches like Wealth, FASTag, credit card, CMS, among others. We expect IDFCFB to continue delivering RoA of 1%+ over FY23-25E.

 

 Strong growth momentum with ROE expansion; Initiate with BUY

Strong growth momentum with ROE expansion; Initiate with BUY

In Q1FY23, the bank's retail book continued to report a broad-based and strong growth momentum of 40% YoY. This was driven by credit cards (+183% YoY), digital and gold loans (+123% YoY), and home loans (+60% YoY). Moreover, the bank has been reducing the infrastructure loan book by 32% CAGR over the past 3 years. "We believe this will lead to stronger asset quality and eventually lower credit costs. We also believe that the bank's ROA/ROE will further expand with strong operating performance, improving asset quality, reducing the cost-to-income ratio with operating leverage and lower credit cost. With this view, we initiate coverage with a 'BUY' rating and a target price of Rs 70/share (1.6x FY25E ABV), implying an upside of 29% from CMP," the brokerage has said.

Disclaimer

Disclaimer

The stock has been picked from the brokerage report of Axis Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.

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