Stock Grew 58.88% In 3 Months, Buy This Mid Cap Banking Stock, Brokerage Sees 42% Potential Upside

Keynote Capitals in its recent report published on 25 October 2022 has given a buy call to IDFC First Bank Ltd (IDFCFB) for an estimated target price of Rs 81 per share. According to the given target price, the stock is likely to surge by 42% from its current level. IDFCFB is a mid-cap private bank having a market cap of Rs 35,324.41 crore.

Stock Outlook & Returns Over The Years

The Current Market Price (CMP) of stock is Rs 56.70 per share on NSE. It is trading 0.18% down from its previous close. The stock touched its 52 week high at Rs 59.45 on 24 October 2022 and the 52 week low at Rs 28.95 on 22 June 2022, respectively.

The stock in the past 1 month has surged by 19.71%, whereas, in the past 3 months it gave 58.88% positive returns. Over the past 1 year, it gave 8.5% positive returns and in 3 years, it gave 36.37% positive returns to shareholders. However, in the past 5 years, the stock has given 0.26% negative returns.

Q2FY23 Results

Double-digit ROE led by strong growth in PAT driven by loan growth

IDFCFB reported a strong growth of 6% on Q-o-Q and 26% on a Y-o-Y basis in the loan book during the quarter. Both the retail and corporate segment contributed to the growth. In the retail segment, home loans, auto loans, credit cards, and digital & gold loans grew by >10% on a Q-oQ basis. Deposits have soared by 9% & 37% on Q-o-Q and Y-o-Y basis, respectively. With consistent improvement in asset quality, the Company's ROE has jumped from ~3% in Q2FY22 to ~10% in Q2FY23. PAT surged by 17% Q-o-Q and 266% Y-o-Y in Q2FY23.

Strong growth in loan book and deposits

IDFCFB reported strong growth of 9% Q-o-Q and 37% Y-o-Y in deposits, led by an increase in CASA deposits by 12% Q-o-Q and 37% Y-o-Y during the quarter. Despite lowering the interest rate, the CASA ratio stood stable at 51.3% in Q2FY23. In the loan book, credit card and digital & gold loans saw a staggering 119% & 134% growth Y-o-Y in Q2FY23, respectively. This growth was due to a lower base. The contribution of digital & gold loans to the total loan book increased from 4% in Q2FY22 to 7% in Q2FY23. The target to reduce the infrastructure financing book is on track, and it decreased from 9% in Q2FY22 to 4% in Q2FY23.

Improvements

Improvement in Cost to Income ratio

IDFCFB has improved its cost-to-income ratio from 77.3% in Q2FY22 to 73.3% in Q2FY23. Management expects the cost-to-income ratio to decrease due to normalizing operating costs, paying off high-cost liabilities, and traction in the credit card business.

Improvement in asset quality

IDFCFB is continuously showing improvement in asset quality. The significant and growing part of the book, i.e., the retail and commercial business financing, which forms 75% of the loan book, has a ~2% gross NPA in Q2FY23. Asset quality in the corporate book is also strong, with adequate PCR of 98%. The Bank expects the infrastructure book to wind down and gross retail NPA to fall below 2%.

Return ratios uptick on track

As per management guidance, to reach double-digit ROE and 1% ROA by the end of FY23. The Bank has achieved an ROE of 10.1% and a ROA of 1.1% in the quarter. The improvement in return ratios is led by 32% Y-o-Y growth in NII and a de-growth of 11% in provision. This led to a mammoth 266% surge in PAT during Q2FY23. The Bank expects return ratios to improve further based on improvement in operating leverage.

View & Valuation

"We maintain our view on IDFC First Bank Ltd with a BUY rating and a target price of Rs. 81 (2.5x FY24E Adj. book value). We expect the Bank to grow its loan book at 20-25% with stable NIM of 6%. Normalization of asset quality will lead to lesser mishaps and improved profitability growth, leading to improved return ratios," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of Keynote Capitals. 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.