IDFC Ltd. : it melts like an icecube?
IDFC Ltd(CMP: Rs. 14.15 and market cap of about Rs. 2260 Crores) is looking interesting now after the fall.
IDFC Ltd. is holding 40% in IDFC First Bank and 100% in IDFC AMC.
Apart from this,a dividend payout of Rs 640 Cr. is also due after the selling of other assets,this is more than a quarter of the market cap.
Apart from this,a dividend payout of Rs 640 Cr. is also due after the selling of other assets,this is more than a quarter of the market cap.
First let's look at the AMC part:
The AMC alone would easily be worth much more than the current market cap.
As of end of FY20,the AUM stood at Rs. 1,03,912 Crores which is almost up 50% from Rs. 69,352 Crores.
Market share of the AMC has improved to 3.85% from 2.84% a year ago.
Now let's take a look at the bank:
The 40% holding in the bank can be reduced to 15% after October 2020.
The current market capitalization of the bank has fallen below Rs. 10000 Crores,down more than 64% in the last one year.
With this price decline and worsening of the asset quality and now with the macro challenges,it will become very difficult for the bank to raise equity capital especially after what happened with Yes Bank and the growing mistrust amongst depositors when it comes to small private sector banks.
Assuming IDFC Ltd. can sell this 25% stake in the bank after October 2020 and pay the proceeds as dividends and even after applying a further 30% market price discount also,this will be about Rs1700 Crores,since this selling will be at a loss,no capital gains tax will be payable.
Alternatively,they could wait for the bank to do well and sell in tranches for a few years and pay dividends with the proceeds.
The management has clearly expressed their intent of creating value for the shareholders,
this was demonstrated by the divestiture of a few non core assets and subsequent dividend payment.
The management has clearly expressed their intent of creating value for the shareholders,
this was demonstrated by the divestiture of a few non core assets and subsequent dividend payment.
Risks:
1.The Bank has still not managed to become profitable,cleaning the books is a lot harder than building it from scratch,every quarter they have some asset that becomes NPA and now with the COVID crisis,the claims made by the management will be tested about their retail book.
2.They have a holding company structure which will mean that whenever they decide to unlock value,there may be some tax payable by the company so please keep that in mind.
3.According to SEBI rules they have to hold 40% in the AMC,so for value unlocking only 60% is available unless they decide to sell the entire asset.
Resources:
Disclosure:
I have initiated a position at CMP.
I am not a registered advisor and am sharing just my thoughts,kindly do your own diligence before you make any buy/sell decision.
As you can see in the above release by IDFC Bank,it has decided to raise capital(Rs 2000 Crores) by way of preference issue at Rs. 23.19 per share which will dilute the bank's book value from Rs. 31.82 per share to Rs. 30.40 per share.
It is not a good outcome for IDFC Ltd. shareholders,when the assets were monetized they were done so with the stated intention of distribution of the proceeds to the shareholders of IDFC limited.
Now the bank has taken another Rs 800 Crores of capital form IDFC limited,why was the bank so desperate to raise funds at this juncture when the share price was trading below book value,if the bank was confident of delivering on its performance it should have waited for the markets to recover and then raised growth capital.
This has altered the risk reward for shareholders significantly with no dividend likely and now returns will depend on how well the bank and AMC business does until there is any corporate action with demerger or sale.
I am not a registered advisor and am sharing just my thoughts,kindly do your own diligence before you make any buy/sell decision.
Update as of May 1,2020:
As you can see in the above release by IDFC Bank,it has decided to raise capital(Rs 2000 Crores) by way of preference issue at Rs. 23.19 per share which will dilute the bank's book value from Rs. 31.82 per share to Rs. 30.40 per share.
It is not a good outcome for IDFC Ltd. shareholders,when the assets were monetized they were done so with the stated intention of distribution of the proceeds to the shareholders of IDFC limited.
Now the bank has taken another Rs 800 Crores of capital form IDFC limited,why was the bank so desperate to raise funds at this juncture when the share price was trading below book value,if the bank was confident of delivering on its performance it should have waited for the markets to recover and then raised growth capital.
This has altered the risk reward for shareholders significantly with no dividend likely and now returns will depend on how well the bank and AMC business does until there is any corporate action with demerger or sale.
Update as of Dec 17,2020:
In November the Reserve Bank of India finally came up with a long awaited proposals from an internal working group that would possibly clear the decks for a merger between IDFC Ltd. and the Bank once they are able to unlock the IDFC AMC value either through sale or demerger.
You can read the full report here:
https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=50695
At the moment these are just proposals and we will have to wait to see how things pan out in the coming days.
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