IDFC BUY @ 35 Target in 1 year Rs. 55

DFC Limited’s (IDFC) good standing and its strong financial flexibility, by virtue of being the main holding company of the IDFC Group. IDFC holds a 100% stake in IDFC Financial Holding Company Limited (IDFC FHCL), which, in turn, holds an equity stake in IDFC First Bank (rated [ICRA]AA+(Stable)/[ICRA]A1+), IDFC Asset Management Company Limited (IDFC AMC), IDFC Securities Limited and IDFC Infrastructure Finance Limited (IDFC IFL; rated [ICRA]AAA(Stable)/[ICRA]A1+). However, as part of its strategy, IDFC plans to divest its stakes in various subsidiaries. While it has already sold the business of IDFC Alternatives, it has signed a definitive agreement with National Investment and Infrastructure Fund II (NIIF II) for the sale of its majority stake in IDFC IFL. The good market value of the company’s holdings in IDFC First Bank1 and the strategic holdings in the unlisted companies of the Group support IDFC’s liquidity profile. This, coupled with investments in mutual funds and cash and cash equivalents of around Rs. 500 crore as on September 30, 2018, provides liquidity cushion. The rating also factors in IDFC’s strong capitalisation levels with a net worth of Rs. 9,775.53 crore, on a standalone basis as on September 30, 2018, with nil borrowings. ICRA, however, takes note of the company’s dependence on dividend income from investee companies (mainly IDFC First Bank and IDFC AMC) as the primary source of income and thus the credit profile of these entities would have a key bearing on the ratings for IDFC. 

Strong market position by virtue of being a key holding company of IDFC Bank – IDFC, through IDFC FHCL (100% subsidiary of IDFC), holds a significant stake in IDFC First Bank (stake of ~40% in the merged entity of IDFC Bank and Capital First Limited). Apart from this, the company has 100% stake in IDFC AMC and IDFC Securities Limited. IDFC recently sold the businesses of IDFC Alternatives. It also entered into a definitive agreement with NIIF II for the sale of its majority stake (81.48% as on September 30, 2018) in IDFC IFL. The transaction is subject to regulatory approvals.

Comfortable liquidity – The company has a comfortable liquidity profile given the investments in mutual funds and cash and cash equivalents of around Rs. 500 crore as on September 30, 2018, which provide liquidity cushion. IDFC also has holdings in various unlisted companies (IDFC IFL, IDFC AMC and IDFC Securities). The liquidity is expected to be further supported by the proceeds from the sale of its stake in IDFC IFL. While IDFC also has a shareholding of ~40% in the merged entity of IDFC First Bank, the stake in IDFC First Bank can, however, be diluted to 20% only in October 2020. 

Strong capitalisation and low gearing targets – On a standalone basis, IDFC had a strong net worth of Rs. 9,775.53 crore as on September 30, 2018 with nil borrowings. The strong current capitalisation and low gearing target, going forward, are credit positives. The capitalisation profile of the merged bank (IDFC First Bank) is expected to remain at a comfortable level without any capital requirement in the near to medium term. Hence, no equity infusion would be required from IDFC in the short to medium term. ICRA expects IDFC to maintain prudent capitalisation levels going forward, as well.  

by : - Thakor Mistry