IDFC or Infrastructure Development Finance Company and its subsidiary IDFC First Bank (formed in October 2015) have been under fire over the past few months. The IDFC Management has organized an informal conference call on September 14 to address concerns from investors. The management was bombarded with questions about their poor loan book, unsatisfactory financial performance, and dangerous exposure to the distressed teleco Vodafone Idea (Vi). As of August 31, 2021, its share price is much above than it was exactly a year back, yet still less than what it was in September 2016. In this piece, we explore what’s pricking IDFC First Bank and what lies ahead for its shareholders. 

Poor Loan Book And Additional Credit Costs

The company booked consistent profits in the financial year 2020-21. However, it recorded a loss of Rs 621 crores in its last quarter Q1FY22. The poor performance is owed to a jump in credit costs, poor quality of loans, and its high exposure to Vodafone-Idea. 

The company’s revenue for the quarter did go up by 11.08% over last year and 2.15% over the previous quarter. However, the credit costs and increasing provisions ate into its revenue. A loan book’s health is measured by two metrics, its Provisions and its Non-Performing Asset Ratio(%). The company’s Gross NPA went from 1.99% in June 2020 to 4.61% in June 2021. Its Net NPA (Gross NPA minus Provisions) has gone from 0.51% to 2.32% in the same period. 

To ensure that a bank doesn’t get into big trouble, it sets aside some money in proportion to its bad loans/NPA ratio. The process of setting aside such funds is called setting aside a Provision. IDFC First’s Provision went up by 54% from Rs 646 crore in Q4FY21 to Rs 1,001 crore in Q1FY22. The more the borrowers default on loans, the higher provisions the bank has to set aside. This time, the second wave of COVID-19 and poor asset quality led to IDFC First setting aside higher provisions. Additionally, the bank has been unable to control its operating expenses. Its Operating Expense went up by ~54% over a year, while its Total Revenue increased only by ~11% in the same period

Unsafe Exposure To Vodafone Idea

In the past few months, IDFC First shares were hammered down till August-end. Nevertheless, the stock regained its position throughout September. The stock has been under pressure since its loan book has high exposure to telecom operator Vodafone Idea. Vi is a financially distressed company. It has Rs 62,000 crore pending in Adjusted Gross Revenue (AGR) dues to the government. The company’s total debt is worth Rs 1.8 lakh crore. Out of the total debt, Vodafone Idea owes IDFC First Bank around Rs 3,240 crore. 

Essentially, IDFC First has 3% of its total loan book exposed to Vodafone Idea. The single-digit number isn’t insignificant. Even SBI, the largest lender to Vodafone Idea, has only 0.5% of its total loan book exposed to Vi. If the telecom company were to shut down completely, IDFC First Bank could face a huge blow. However, Vi’s shutdown is not certain as the government has provided a four-year moratorium to all telecom companies with pending AGR dues. IDFC First Bank had set a provision of Rs 324 crore, which is 15% of total exposure to Vodafone Idea.

Ideally, IDFC First’s share price revolves around news regarding Vodafone Idea. The day the government announced the moratorium for Vodafone-Idea’s AGR dues, IDFC First Bank’s shares rallied by ~4.5%. Apart from other indicators, an ideal investor should watch out for the status of Vi to map the share price of IDFC First Bank. 

Shareholder’s Concern

IDFC First Bank’s parent company IDFC Ltd is performing worse than its subsidiary. On September 14, 2021, IDFC Ltd. held an informal conference call to address investor’s concerns about the company’s performance in recent months. They were bombarded with questions from its shareholders. The entire conference call hinted towards dissatisfaction amongst the shareholders. They questioned the top-level management on CEO salary, management decisions, and the complexity in the structure of the company. They even addressed the loss in value for its shareholders and questioned the company about how it plans to address it. 

In the conference call, shareholders suggested two things: the sale of the Asset Management Business and a ‘reverse merger’ with its better-performing subsidiary IDFC First Bank. IDFC Ltd indeed plans to reverse merge with its subsidiary IDFC First Bank in which it holds close to 36.5% stake, mostly after the sale of its asset management business. You can check out the whole conference call here.

The Way Ahead

Despite some headwinds, why could IDFC First Bank be a good buy for investors? The reason is simple. Supportive technical indicators and a strong plan by the management. The company is ~30% below its 52 week high of Rs 51.4 per share. The moratorium provided by the government to telecom companies on AGR dues provided relief to IDFC First Bank shareholders. The share price rallied ~4.5% after the decision.

IDFC First’s management has some plans to turn the game around. The company plans to reduce its wholesale business (lending money to other big institutions) and increase its retail business (housing loans, personal loans, etc). The bank further plans to have at least 70% retail loans in its loan book in the next few years. This allows the company to diversify and reduce the burden of increasing corporate debt. India’s booming housing market in the coming years may support IDFC First’s plans of pressing on its retail business.  

IDFC First Bank is expecting to gain traction, reduce its credit costs, provisions for bad loans, and NPAs. This will eventually translate into very good profit numbers in the coming quarters and a rally in stock prices for the coming months. 

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