RBI has issued in-principal approval for a banking licence to IDFC. The infra funding company will get 18 months to comply with RBI guidelines. We view this as a positive development for the lender, which had been struggling with growth visibility over the last few quarters. We are revisiting our estimates on this stock and our target price is under review.
Over the last few quarters, the disbursals linked to the power and roads sector had started tapering down in absence of fresh approvals for IDFC, while short-term refinancing in telcos kept the balance sheet moving.
With IDFC commencing banking operations in FY16, we expect it to lever up from 4.8x at present (22.5% of tier-1 ratio) to 7-8x in the first year of operations and then closer to 10x.
Comparison with private sector peers indicates attractive valuation for the stock. Private sector banks with 17?18% earnings growth trajectory and 17?18% RoE are trading currently around 1.7?1.8x 1-yr forward ABV. In comparison, IDFC currently trades at close to 1.3x 1-yr Fwd ABV. If execution goes on track for the lender, we do see strong upside for the lender in the medium term.
