By Axis Securities
The bank successfully implemented its de-risking strategy
We initiate coverage on IDFC First bank Ltd (IDFCFB) with a Buy recommendation and a target price of `70/share, implying an upside of 29% from the CMP. We believe the company has all the right levers to grow profitably from here on supported by its successful transition from infrastructure lending to building a diversified retail-focused loan book. 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.
On the deposit front, IDFCFB has focused on building a granular liability franchise for the past five years. Consequently, retail deposits (Retail CASA + Retail Term Deposits) grew at a thee-year CAGR of 73% to reach `68,035 crore 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 three 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.
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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.
We initiate coverage with a ‘BUY’ rating and a target price of `70/share, implying an upside of 29% from CMP.
