About Me

 Independent investor managing own funds

 Previously worked for more than a decade in the
mutual fund industry in multiple roles
 Disclaimer

 I am not a Registered Investment Advisor

 Me, my family members and my friends have vested
interest in the company under discussion and hold
the stock
 This is not a stock recommendation and is illustrated
only for educational purposes
 Please do your own due diligence prior to making
any investment decision and/or consult a registered
investment advisor
 IDFC Limited

A ‘ROCK’ FOR THE PRICE OF MUD

 About the company

IDFC Limited

IDFC FHCL
100%

IDFC IDFC
IDFC IDF
Securities Alternatives
81.5%
100% 100%

IDFC Bank
IDFC AMC
Post merger shareholding
100%
~ 40%
 Sum of the Parts

Entity Potential Valuation (cr) Basis of Valuation

IDFC Bank 7000 cr Quoted Value
IDFC AMC 3500 cr 5% of AUM
IDFC Securities 500 cr 20x PE
IDFC Alternatives 250 cr 2.5% of AUM
IDFC Infra Finance 600 cr 1x Book Value
Other Investments 500 cr
Total 12350 cr
 Mr Market’s offer

 Value
 Conservative value of ~Rs 12000 cr of which non bank
investments potentially contribute ~ Rs 5000 cr
 Price
 Current market capitalization of ~Rs 7000 cr with a debt free
balance sheet
 Price implies roughly 40% holding company discount

 Price equals value of stake in the bank with other investments

coming free
 So what’s the BIG DEAL ?

 Legitimate Question
 Why care ? “This is not the first holding company to trade at
a discount”
 Answer
 No intent to preserve the holding company structure

 Management seeks to ‘unlock value’ through sale/direct

listing and eventual collapse of the structure
 No intent to start any new business under the company
 Management Commentary from recent concalls

 Going forward, our focus will be on simplifying the structure to unlock value
for our shareholders. In some businesses we are open to divesting to monetize
value, in some we are keen to invest in growth, we are open to strategic
partnerships also. We are keen to deliver on these in a tax efficient manner. It
is our intent to eventually work towards collapsing the structure
 But the intent and the direction has been clearly stated for all our
shareholders to be in line or to be aware of the direction which we will be
taking over the next few years or may be 1 or 2 years and in line of that all
options are on the table. Again, I would like to say we are keen to deliver this
on a tax efficient manner and one has to work through the best option which
will give you and all the shareholders the highest possible return with low tax
risk.
 Management Commentary from recent concalls

 Obviously I hope you aware that this current structure is based upon the 2013
Banking Guidance License conditions. so all of this is subject to RBI approval.
But directionally if you read 2016 guidelines and 2013 guidelines, to be able to
collapse the structure what it would require is that all non- Banking
businesses are not in the form of an IDFC brand or a group structure. So, the
businesses can exist independently either through listed, if they are in a
position to get listed but with brand of course we will need to work with RBI,
but most likely the branding will also not be allowed, common branding but
whether it is a first name, second name, etc. So the structure could be
collapsed subject to RBI blessing and approval provided we are in a corporate
structure which basically is focused only Banking in the brand name of IDFC
 Analyst - Just on the strategic direction that you have articulated, is it fair to
conclude that among these various businesses we have in IDFC aside from the
Bank, some are likely to be divested and some are likely to be spun off in a
demerged entity and as a shareholder we may end up in some of those. Is that
the way to think about it?
 Management Absolutely correct. You have summarized it very well.
 Management Commentary from recent concalls

 Analyst Hypothetically let's say some of the businesses are sold or merged
and so on, then how can we return this money to the shareholders, and are we
looking to return the money to IDFC limited shareholders?
 Management I made a statement earlier also that the fact that I have
distributed 100% of distributable profit is an indication of our intent. So given
whatever happens whenever it happens, yes the intent is to distribute the
same to the IDFC shareholders in a tax compliant manner.
 Analyst Okay, so you would be looking at some alternatives instead of
dividend, because I am assuming that dividends are not tax efficient in the
hands of the shareholders?
 Management Yes, my usage of the word was tax compliant, not necessarily
only tax efficient, so one has to balance the two. Whatever is allowed as per
laws we will take care of it, but the intent statement is important.
 Analyst Does IDFC have any plans to enter any new businesses?
 Management No
 Probable Roadmap ?

Entity Possible Event Source

IDFC AMC Complete Exit Media Reports
IDFC Securities Complete Exit Media Reports
IDFC Alternatives Complete Exit Largest of 3 verticals sold,
other 2 up for sale as per AR
IDFC IDF Demerger & Listing My View
Setting the stage for eventual collapse ?

IDFC
Limited

IDFC FHCL
100%
IDFC IDF

IDFC Bank
Post merger shareholding
~ 40%
 An alternate view at valuations

 An opportunity to buy the bank at a steep discount

 Assuming sale proceeds of ~ Rs 5000 cr returned to investors

 One is paying Rs 2000 cr (Rs 7000-Rs5000 cr) for the bank

stake current value of which is Rs 7000 cr, a discount of 70%
 Proxy to owning the bank factoring in future collapse
of structure
 IDFC Bank (post CAPF merger) trades at ~ 1.05x FY19 ABV
 Holding IDFC Ltd translates to holding IDFC Bank (post CAPF
merger) at ~ 0.3x FY19 ABV
 Scenario Analysis looking 5 years forward

Possible Scenarios 1 2 3 4 5
Price Paid today to buy IDFC Ltd 7000 7000 7000 7000 7000
Sale proceeds from non bank holdings 5000 5000 5000 5000 5000
after 2 years
Value of bank stake after 5 years 7000 2000 4000 11500 14000
CAGR Returns (XIRR) 16% 0% 8% 25% 29%
Rs crores

A ‘rock’ for the price of Mud

 Key Highlights: FY18 (1 of 2)
No. of Customers CASA/Deposits
(Total: 27 lacs | IBL customers: 13 lacs) 27.0
(In lacs) 24.0 11.8%
19.4
10.1%
16.0 12.9
13.8 12.2 8.2%
11.1 6.8%
10.1
9.6 5.2%
14.1
11.0
5.9 8.3
4.1
Mar-17 Jun-17 Sep -1 7 Dec-17 Mar-18

Customers - exc l IBL Customers IBL

Customers acquired in Q4 FY18: 309K (B+: 59K; BB: 250K) Mar'17 Jun'17 Sep'17 Dec'17 Mar'18

Funded book diversified into Al l fi gures i n ` Crores

Core Deposits
Corporates &Retail
March 17 R
( s. 70,248 Cr) March 18 R
( s. 70,932 Cr) 10,053
CASA Ret ail TD
PSL Bu you t
PSL 10% 8,162
Re ta il Corpor
Buyout Re ta il
4% a te s 7,043 4,343
15% 11% 6,281
27%
Stre s sed Corp ora tes 4,906 3,908
Stre s sed As s ets 37% 3,843
As s ets 3,431
8%
11% I n fra structu 2,812
I nfra structure 5,710
re 4,254
43% 2,850 3,200
34% 2,094

Mar-17 Jun-17 Sep -1 7 Dec-17 Mar-18

Note: Grama Vidiyal (GV) is now renamed as IDFC Bharat Ltd (IBL)
Key Highlights: FY18 (2 of 2)
Network Funded/Non Funded O/S Asset mix ` 1,29,473 Cr3 Funding mix 1̀05,485 Cr
Funded:`70,932 Cr (FY17: ` 1,15,840) (FY17: ` 90, 470)
18,096 (8,613)
CASA 5,710
Gross A dvance s
(FY17:` 70,248) 53,753
Branches: 150 (74) Gross Cr edit Inv. 17,179
Retail FD 4,343 31,839
Non-funded: ` 27,905 Cr Legacy long term B onds
BC & I BL : 387 (350) (FY17: `18,605)`
Cash & Bank 1,768
Corp. f ixed depo sits 18,483
Sta tutory Inv. 19,458
Merchant points: 17,474 T rading Inv. 27,899
Certificate of Deposits 19,662
(8,142) CB LO/R epo/L AF 20,534
Othe r A sse ts 9,416 Others 4,915
ATM: 85 (47)
CASA Ratio1 Deposits
CASA: ` 5,710 (` 2,094)
11.8% (FY17: 5.2%) Term Deposits: ` 22,826
(` 17,970)
Loan NIMs: 2.4% Treasury NIMs: 1.1%
CASA: ` 5,710 Cr (` 2,094 Cr)
• Reta i l : ` 1,617 (` 600) Certificate of Deposits: (FY17: 3.1%) (FY17: 1.0%)
• Whol es a l e: ` 4,093 Cr (` 1,495 Cr) ` 19,662 (` 20,144)

Operating Income Cost/Income PAT RoA | RoE

54.1%
` 3,056 Cr (FY17: 42.1%)
(FY17: ` 3,030)
` 859 Cr 0.7%| 5.7%
(FY17: ` 1020 Cr) (FY17:1.0% | 7.2%)
HR Cos t/I ncome: 22.9%
NII: ` 1,859 Cr (` 2,076) (FY17: 19.7%)
Non Int: ` 1,197 Cr (` 954)

FY18 EPS| Book value Asset Quality Capital Adequacy Headcount

per share
GNPL: 3.3%
(FY17: 3.0%)
Net RSA: 1.0%
(FY17: 1.3%)
18.00% 5,814
2.5 | 44.8 (FY17: 18.9%) (FY17: 3,806)
(FY17: 3.0 | 43.2) NNPL: 1.7% Net SR: 3.0%
(FY17: 1.1%) (FY17: 3.3%) Ti e r 1: 17.67% Including IBL:9,670
Ti e r2: 0.32%
(FY17: 7,338)

1. CASA Ratio = CASA/(CASA+FD+CD)

Note: ( ) denotes FY17 numbers
 What can go wrong?

 Management does not walk the talk, unable to find

buyers, regulations hinder execution etc
 Under lying subsidiary business growth could cushion impact
 Subsidiary sale happens at unfavourable valuations
 Return expectations would moderate but still likely attractive

 Excessive time taken for corporate action

 Return expectations would moderate but still likely attractive

 IDFC Bank ends up as a basket case

 Unlikely to be a sudden event

 When facts change, one changes his mind

Thank YOU !!