Motilal Oswal has given Buy recommendation for IDFC First Bank recommended buy rating on the stock with a target price of Rs 70 in its research re with a target price of Rs. 70 in its research report issued on Oct 17, 2022
Motilal Oswal’s research report on IDFC First Bank
IDFC First Bank (IDFCFB) has strengthened its balance sheet over the past few years as it consciously increased the mix of retail business. The bank reported 5x growth in retail deposits over the past three years and simultaneously improved CASA mix to 50%. Further, the retail loan book posted an impressive 31% CAGR over FY19-22. IDFCFB is well positioned to benefit from gradual run-down of its high-cost legacy borrowings over FY23-26E (INR224b at 8-9% cost) and replace them with deposits (at ~5.5% cost). ~77% of such bonds will be refinanced by FY25E. This will potentially add ~INR7.5-8.0b to NII (FY22 NII: INR97b) in due course. IDFCFB has made substantial investments in building the franchise, which has resulted in sub-optimal cost metrics. However, we expect the operating leverage to improve (C/I ratio at 66% by FY25 vs 75% in FY22) thereby aiding earnings. The bank is entering a phase of strong loan growth as the drag from wholesale book moderates. This will be aided by a strong growth in profitability due to replacement of high-cost borrowings, better cost trends and controlled credit costs (1.3-1.5%).
We estimate return ratios to improve sharply with RoA/RoE reaching 1.3%/ 13.9% in FY25E, respectively. We initiate coverage with a ‘BUY’ rating and a TP of INR70 (premised on 1.5x Sep’24E BV). A key near term event would be the merger of IDFC Ltd and IDFCFIRST. IDFC owns 36.5% stake and both entities have accorded in-principle approval towards the merger (link1/link2).