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Allowed to exit bank’s promotership; holdco discount to narrow significantly

IDFC Limited (IDFC) has received the much-awaited clarification from the RBI (vide its letter dated 20th July’21) which states that after the expiry of lock‐in period of 5 years (Oct ’20), it can exit as the promoter of IDFC FIRST Bank.

* IDFC Ltd currently owns 100% in IDFC Financial Holding Company (IDFC FHCL – a non-operative financial holding company).

* IDFC FHCL, in turn, owns 36.6% in IDFC FIRST Bank (post recent equity raise) and 100% in IDFC Asset Management.

IDFC Limited is currently being valued at Rs84bn (market cap). At this value, it is trading at more than 45% discount to fair value of its holding interest in these subsidiaries (Rs156bn – refer table 1).

* IDFC’s interest (indirect ownership through IDFC FHCL) of 36.6% in IDFC FIRST Bank translates to value of ~Rs116bn or Rs72 per share.

* Assigning a value of 3.5% AUM or 25x PE for its asset management arm, fair value for IDFC AMC would be ~Rs40bn.

* IDFC AMC as of FY21 has AUM of Rs1.15trn (market share of 4%) which constitutes: 1) Equity AUM of Rs250bn (Rs178bn equity and Rs72bn arb), 2) fixed income AUM of Rs900bn including Rs760bn debt funds and Rs134bn liquid funds. In FY21, IDFC AMC reported revenues of Rs3.7bn and PAT of Rs1.44bn.

The way forward...

* We believe IDFC FIRST Bank will be allowed to exit NOFHC structure if it does not have other group entities in its fold. Consequently, IDFC will now continue with its process to spun off its asset management business.

* Simultaneously, we believe IDFC with this clarification from the RBI will now proceed towards ‘scheme of arrangement’ via merger process. Suggested lock-in period of 5 years for exit of IDFC as a promoter is already over as IDFC FIRST Bank was incorporated in Oct’15.

* We believe the entire process will take another 9-12 months as it will have to go through regulatory approvals (RBI, SEBI, NCLT), Board and shareholders’ approval of the involved entities.

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