IDFC: Hold

The RBI has granted in-principle approval to IDFC, a leading lender in the infrastructure space, for a new bank licence. The stock did not react to the announcement, as much of the impact of transitioning into a bank has already been factored into the current price.

The stock had fallen sharply till a month back on concerns that its transformation into a bank would hurt profits. But it has rallied 30 per cent in the last one month, and now trades at a price-to-book value of 1.1 times. This is at par with some of the smaller regional banks such as KVB and CUB, but at a discount to YES Bank (25 per cent) and Kotak Bank (50 per cent), which were awarded licences a decade back.

While the company’s return-on-equity is expected to dip to single digits in the near term, transition into a bank will help it diversify its lending and deposit base. As benefits of low-cost deposits (CASA) start to trickle in, the ROEs are expected to scale back to 11-14 per cent in the next three-four years. However, given that both YES Bank and Kotak Bank still have only 2-3 per cent market share in CASA deposits, how well IDFC is able to leverage the retail franchise will have to be seen. That said, investors can hold on to the stock, given its reasonable valuation.

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