Hold Idfc Ltd For Target Rs.70 - ICICI Direct
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Three-way merger getting closer…
About the stock: IDFC Ltd is registered with RBI as NBFC - Investments. Besides banking, it also has investments in diverse businesses such as asset management, and infrastructure debt fund.
* It received a license from RBI to set up a bank in 2014
* IDFC AMC has an AUM of |126335 crore
About event: IDFC Bank’s board announced a merger with two group companies
* In-principle approval of merger with IDFC Ltd and IDFC Financial Holdings
* Board has constituted committee to work upon terms of proposed merger
* Unlocking of value of IDFC Ltd as it was trading at holding company discount
What should investors do? IDFC Ltd has jumped over 11% with the reverse merger news coming in; while in the past one year, the stock has increased over 50%. We believe that ‘in-principle’ approval is one step closer to materialisation of merger event but there is uncertainty about the timeframe in which this can happen.
* We rate IDFC Ltd to HOLD from BUY as discounting of merger seems to have already materialised
Target Price and Valuation: In our SoTP, IDFC First Bank is valued at ~1.6x FY23E ABV and AMC business at 4% of AAUM to arrive at a revised target price of | 70 per share for IDFC Ltd post 40% holding company discount.
Impact on IDFC First Bank: The whole process of reverse merger could be undertaken in following ways;
* IDFC Ltd to exit AMC business and proceeds from sale to be distributed as one-time dividend. Post this, reverse merger with the bank wherein swap ratio is anticipated to remain neutral with only change in shareholder pattern
* IDFC Ltd to exit from AMC business and reverse merger to be undertaken with additional capital ploughed in the bank. In such scenario, swap ratio will be higher (to account for additional capital inflow) and the transaction will be win-win for both entities as it will strengthen bank’s balance sheet
Key triggers for future price performance:
* Unlocking of value which has been trading at a holding company discount
* Reduced complexity due to single entity structure
Alternate Stock Idea: Apart from IDFC Ltd, we also like Muthoot Finance.
* Muthoot Finance is a leading gold financier in India with overall AUM of |60918 crore as on September 2021.
* BUY with a target price of | 1920
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