17 JUL 2017 Company Report Not Rated Target Price:NA
CMP : Rs 65 Potential Upside : NA
MARKET DATA
No. of Shares : 3,401 mn Market Cap : Rs 220.2 bn Free Float : 47.2% IDFC + Shriram Group Avg. daily vol (6mth) : 10.8 mn shares 52-w High / Low : Rs 83 / Rs 96 Bloomberg : IDFCBK IB Equity BANKS & FINANCIAL SERVICES Promoter holding : 52.8% : Deal not value accretive FII / DII 17.8%/6.8%
*Note: All the above details refer to IDFC Bank
220 Sensex IDFC Bank 180
140
100
Financial summary (FY17) 60 Market CMP PAT EPS BV P/E P/BV RoE RoA Net NPA Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Cap (Rs bn) (Rs) (Rs mn) (Rs) (Rs) (x) (x) (%) (%) (%) IDFC Bank* 220 65 10,197 3.0 43 21.5 1.5 7.2 1.0 1.1 IDFC Ltd* 96 60 6,991 4.4 68 NA NA 6.5 0.6 NA SHTF 246 1,087 12,573 55.4 498 18.8 2.3 11.7 1.8 2.5 SCUF 165 2,488 5,561 84.3 763 25.5 3.1 11.7 2.5 1.8 Source: Company, Axis Capital * Bloomberg 17 JUL 2017 Company Report
IDFC Announcing the Mega Merger: IDFC + Shriram BANKS & FINANCIAL SERVICES
IDFC and Shriram group announced a 90-day exclusivity period to discuss a merger. The plan is to merge IDFC Bank with Shriram City Union Finance (SCUF); whereas Shriram Transport Finance (SHTF) and other Shriram group entities (life insurance, general insurance, AMC) will be separate subsidiaries of IDFC Ltd. Based on CMP, every shareholder of SCUF is likely to get ~39 shares of IDFC Bank and while those of SHTF may get ~18 shares of IDFC Ltd or SHTF may get de-listed and shareholders will be compensated. SHTF is not being merged with the bank (it will be a 100% NBFC under IDFC Ltd) as (1) there is large burden of SLR/CRR/Agri PSL requirements; (2) cap on inter-bank borrowings and (3) this will lead to significant dilution for IDFC group shareholders.
The merged Bank will have ~Rs 1.1 trn of advances (7th largest in private sector) and ~1,070 branches (6th largest). The merger will create a financial conglomerate with mass retail focus and cater to the under served while providing a full range of financial products.
We believe the merger is a negative for shareholders of SCUF (exposure to large infra assets, lower return ratios) and SHTF (holdco discount on IDFC Ltd shares) but a positive for IDFC Bank shareholders. The Bank will leapfrog into a well-diversified, retail-oriented private bank business but consolidation to take 2+ years. We put SHTF and SCUF under review till the ratios are announced. We do not have coverage on IDFC Ltd and IDFC Bank.
7th largest private bank in terms of advances (FY17) 6th largest private bank in terms of branches
6,000 5,546 6,000 4,642 (Rs bn) 4,850 4,820 (nos) 5,000 5,000 3,731 4,000 4,000 3,304 3,000 3,000
2,000 1,361 1,323 2,000 1,369 1,131 1,083 1,200 1,072 1,000 1,000 1,000 0 0 HDFCB ICICIBC AXSB KMB YES IIB Merged ICICIBC HDFCB AXSB KMB IIB Merged YES Entity Entity
Source: Company, Axis Capital; Data for combined IDFC Bank + SHTF 2 17 JUL 2017 Company Report
IDFC Merger structure – SCUF under the Bank, rest under IDFC Ltd BANKS & FINANCIAL SERVICES
Merged entity, a financial conglomerate…
IDFC Ltd (Holdco)
IDFC Bank + Shriram Transport Shriram Life Shriram General IDFC AMC + - IDFC AIF Shriram City Finance Co Insurance Co Insurance Co Shriram AMC - IDFC IDF Union Finance Co - IB & Broking
Customer life cycle in focus – cross sells to a ~10 mn customer base
Wealth Savings Credit Protection management
3 17 JUL 2017 Company Report
IDFC Approval process…to take over 12 months BANKS & FINANCIAL SERVICES
• Individual company boards
1 Both the groups have signed an exclusivity arrangement for 90 days wherein they will evaluate the merger viability/ valuations and other legal aspects. Post which they will approach the boards for final approval and announce the merger ratios • RBI & other regulatory Approvals from all the key regulators will be required - bodies RBI, SEBI, IRDA, NCLT, Competition Commission, Stock 2 exchanges
The above process is likely to take 12-18 months to complete and we may see a combined entity only by end FY19, hence a significant amount of management bandwidth and time over the next two years will be • High courts / legislatives invested in creating this large financial services 3 conglomerate
4 17 JUL 2017 Company Report
IDFC Positives from the deal….Retail…Retail...the buzz word BANKS & FINANCIAL SERVICES
The merger will create a large universal bank with a core retail offering – which includes key businesses under one umbrella – liability & asset products, fee products like life insurance, general insurance, asset management, broking, private equity and investment banking
The combined group (IDFC Ltd) will have ~70% of business interests coming from retail segment
A large branch network (~2,000 in the group, of which ~1,070 in the merged bank) with an even spread across urban and rural markets will help mine customer data and cross sell to ~10 mn group customers
For IDFC Bank, PSL requirements ease up significantly with the inclusion of SCUF’s retail portfolio focus on MSE lending However, direct agriculture lending targets may be a challenge
Blended RoA for IDFC Bank improves with the inclusion of SCUF’s high yield portfolio
The deal structure also offers Shriram Capital shareholders an opportunity to unlock value
IDFC will be able to use Shriram brand that has a much wider acceptance in many regions, thereby getting some advantage in garnering retail liabilities
5 17 JUL 2017 Company Report
IDFC Merger hurdles – no easy ride BANKS & FINANCIAL SERVICES
The biggest challenge would be obtaining RBI approval for the current deal structure, which seeks to keep Shriram Transport outside the Bank As per the licensing agreement of IDFC Bank, any credit businesses should be under its fold and not under the NOFHC Mr. Ajay Piramal (key shareholder of Shriram group) believes the proposed structure will get regulatory approval Our view remains that even if RBI permits at this juncture (chances look meek), they may not get a window of more than 12/24 months within which they will be required to merge SHTF with IDFC Bank Hence, significant dilution for existing IDFC Bank shareholders will be an overhang Further, equity stakes of certain large shareholders in the merged entity can be above the regulatory threshold
HR & cultural issues are another set of challenges in the entire consolidation process
Huge dilution will be required for complete amalgamation (both at IDFC Ltd and IDFC Bank level)
Meeting direct agriculture lending targets (under priority sector lending norms) for IDFC Bank can be cumbersome on a larger balance sheet
SCUF & SHTF are yet to shift to 90 DPD on NPA recognition norms, which will put additional NPA burden on merged entity
Cost/ Income may escalate in the initial years as: Low cost structure of NBFC may need to be realigned with that of the bank Relocation/ refurbishment of existing NBFC branches to suit that of the bank will involve significant costs Training/ retention costs for existing employees Drag from SLR/CRR requirements will pull down the denominator (income)
6 17 JUL 2017 Company Report
IDFC Current shareholding to be a challenge BANKS & FINANCIAL SERVICES
Top shareholders of SCUF (%) % SHRIRAM CAPITAL LTD 33.8 Shriram Capital’s stake falls from 33.8% to 13.5% in DYNASTY ACQ FPI LTD 20.4 IDFC Bank; Piramal Enterprises will own 4% directly PIRAMAL ENTERPRISES 10.0 in IDFC Bank EAST BRIDGE 3.9 MATTHEWS 3.6
Top shareholders of SHTF (%) % SHRIRAM CAPITAL LTD 26.1 Piramal Enterprises will indirectly hold 2.25%, taking PIRAMAL ENTERPRISES 10.0 its beneficial interest in the bank to 6.25% (will JPMORGAN CHASE & CO 3.6 require RBI approval) CAPITAL GROUP 3.1 SANLAM LIFE INSURANCE 3.0
Top shareholders of IDFC Bank (%) % IDFC FIN HDFS LTD 52.9 GOI 7.7 IDFC Ltd (NOFHC) promoter stake falls to ~31.7% SIPADAN INVSTS MAURITIUS 4.4 (below the minimum promoter threshold of 40% COMMONWEALTH BANK OF AUSTRALIA 4.1 which was a licensing requirement) PLATINUM INTERNATIONAL 1.7
Top shareholders of IDFC Ltd (%) % GOI 16.4 COMMONWEALTH BANK OF AUSTRALIA 10.9 SIPADAN INVSTS MAURITIUS 9.5 ICICI PRU LIFE AMC 7.3 Note: All calculations based on market cap of the BIRLA SUN LIFE AMC 5.3 4 companies as of 7th July 2017 Source: Company, Axis Capital, Bloomberg
7 17 JUL 2017 Company Report
IDFC Merged Entity (IDFC Bank + SCUF) – key parameters BANKS & FINANCIAL SERVICES
Merged Enitity FY17 SCUF IDFCB (Rs b n) SIZE & SCALE Total Income (Rs bn) 44.3 95.5 139.8 Net Profit (Rs bn) 5.6 10.2 15.8 To leap into the league of large private banks with Net Worth (Rs bn) 50.3 146.8 197.1 significant share of retail assets. Retail liabilities to still Market Cap (Rs bn) 165.0 220.0 385.0 remain a challenge AUM (Rs bn) 231 852 1,083.0 Total Assets (Rs bn) 245 1,122 1,367.0 REACH Customers (mn) 3.6 1.4 5.0 Branches 998 74 1,072 Significant addition to branch and customer network – Employees 26,783 3,906 30,689 however costs to be involved in upgradation/ training ASSET QUALITY GNPA (%) 6.7 3.0 3.8 NNPA (%) 1.8 1.1 1.2 CAPITAL POSITION Tier 1 Cap (%) 22.3 18.5 19.2 Total CAR (%) 23.9 18.9 19.8 RETURN METRICS RoAA (%) 2.3 0.9 1.2 RoAE (%) 11.1 6.9 8.0 Blended return ratios to improve but liability accretion VALUATIONS and customer/ employee transition to be the key P/BV (FY17) 3.1 1.5 1.8 P/E (FY17) 25.5 21.1 22.8
Source: Company, Axis Capital, Bloomberg
8 17 JUL 2017 Company Report
IDFC Shriram – IDFC merger BANKS & FINANCIAL SERVICES
Why it makes sense for IDFC? Why it makes sense for Shriram group ? Significant reach and presence IDFC’s Bank license and associated benefits (incl. low Low cost client acquisition cost funds) Management expertise of Shriram Group in retail loans Ability to cross sell liability products and make customers esp unserved and under served segments stick Ability to cross sell to ~10 mn customers Management expertise of IDFC group in large corporate and infrastructure loans
5th largest employer in private banking sector Profitability still far away – asset quality woes persist
100 89 160 145 81 ('000s) (Rs bn) 80 120 98 57 60 80 40 33 31 26 37 34 33 20 40 29 20 16
0 0 HDFCB ICICIBC AXSB KMB Merged IIB YES HDFCB ICICIBC AXSB KMB YES IIB Merged Entity Entity
Source: Company, Axis Capital; Data for combined IDFC Bank + SHTF Source: Company, Axis Capital; Data for combined IDFC Bank + SHTF
9 17 JUL 2017 Company Report
IDFC IDFC Bank + SCUF portfolios BANKS & FINANCIAL SERVICES
Business mix – IDFC Bank - Rs 852 bn (Retail ~2%) Business mix (%)– Shriram City Union Finance (Rs 231 bn)
Sub-segment Key products
Infra Project finance 2Wheeler Gold Loans Emerging large Term loan 18 corporates Working Capital Finance 15 Conglomerates Trade Finance - Escrow/ LG/ BG/ Export finance PSUs Cash Management Others SME 13 Corporates linked finance 55 MNCs FX & DCM
ECM & Private equity
The merged entity will have a well diversified loan mix: SCUF’s 2Wheeler and SME finance book IDFC Bank’s large corporate and Infra finance book
10 17 JUL 2017 Company Report
IDFC Bank Company financials (Standalone) – IDFC Bank BANKS & FINANCIAL SERVICES
Profit and loss account Balance sheet Rs mn Rs mn Interest Earned 85,327 Source of funds Other Income 10,131 Capital 33,990 Total (A) 95,4 58 Reserves 112,780 Equity Application Money 11 Interest expended 65,154 Deposits 402,082 Payments to/Provisions for Employees 5,736 Borrowings 502,622 Operating Expenses & Administrative Expenses 4,432 Other Liabilities & Provisions 70,112 Depreciation 1,343 TOTAL LIABILITIES 1,121,597 Other Expenses, Provisions & Contingencies 4,083 Provision for Tax (13) Application of funds Deferred Tax 4,525 Cash & Balances with RBI 30,363 Total (B) 85,261 Balances with Banks & money at Call 20,657 Investments 504,717 Adjusted Net Profit (A-B) 10,197 Advances 494,017 Fixed Assets 7,866 Equity Dividend (%) 7.5 Other Assets 63,977 Dividend Per Share (Rs) 0.8 TOTAL ASSETS 1,121,597
Earnings Per Share 3.0 Source: Capitaline, Company Book Value Per Share 43
Source: Capitaline, Company
11 17 JUL 2017 Company Report
Shriram Transport Finance Company financials (Standalone) - Shriram Transport Finance BANKS & FINANCIAL SERVICES
Profit & loss (Rs mn) Balance sheet (Rs mn) Y/E March FY16 FY17 FY18E FY19E Y/E March FY16 FY17 FY18E FY19E Interest earned 101,953 106,409 113,154 125,144 Total assets 679,633 744,103 814,969 923,050 Interest expended (50,579) (51,874) (56,084) (61,844) Cash & Balances with RBI 39,239 44,407 29,390 33,294 Net interest income 51,374 54,535 57,070 63,299 Investments 13,562 15,494 17,043 18,747 Non interest income 982 1,897 1,517 1,669 Advances 618,784 654,629 734,745 832,351 Net incom e 52,356 56,432 58,588 64,968 Fixed assets 1,011 880 866 876 Operating expenses (13,473) (12,750) (13,666) (14,556) Other assets 7,038 28,694 32,925 37,782 Staff expenses (5,891) (5,482) (6,031) (6,513) Total liabilities 679,633 744,103 814,969 923,050 Other operating expenses (7,582) (7,267) (7,635) (8,043) Equity capital 2,269 2,269 2,269 2,269 Operating profit 38,882 43,682 44,922 50,413 Preference capital - - - - Provisions & contingencies (21,068) (24,443) (20,560) (22,022) Reserves & surplus 99,272 110,753 123,153 137,603 Pre-tax profit 17,814 19,239 24,362 28,390 Networth 101,541 113,022 125,422 139,872 Tax expense (6,032) (6,666) (8,259) (9,624) Borrowings 497,907 531,100 596,549 661,704 Profit after tax 11,782 12,573 16,103 18,766 Deposits - - - - Extraordinary item - - - - Other liabilities & prov. 80,185 99,981 92,998 121,475 Minority interest/Associates - - - - Adj. P AT 11,782 12,573 16,103 18,766
Source: Company, Axis Capital
12 17 JUL 2017 Company Report
Shriram Transport Finance Company financials (Standalone) - Shriram Transport Finance BANKS & FINANCIAL SERVICES Key ratios (%) Y/E March FY16 FY17 FY18E FY19E Per share data FDEPS (Rs.) 52 55 71 83 BV (Rs.) 448 498 553 616 Adj. BV (Rs.) 412 447 461 519 DPS (Rs.) 12 11 16 19 Dividend payout (%) 23 20 23 23 Yields & Margins (%) Yield on advances 18.4 16.7 16.3 16.0 Cost of deposit - - - - Net interest margin 8.6 8.0 7.8 7.8 Asset quality (%) Gross NPAs 5.9 7.6 9.6 9.3 Net NPAs 1.8 2.5 4.1 3.8 Credit cost 3.6 3.5 2.7 2.0 Provisioning coverage 70.4 69.3 62.0 63.1 Capital (%) Tier-I 14.7 15.2 14.7 13.8 CAR 17.6 16.9 15.9 15.0 Efficiency (%) ROA 1.9 1.8 2.1 2.2 ROE 12.2 11.7 13.5 14.1 Cost to income 26 23 23 22 CASA - - - - Effective tax rate 34 35 34 34 Growth (% ) Net interest income 43 6 5 11 Fee income - - - - Source:Operating Company, expenses Axis Capital 20 (5) 7 7 Profit after tax (5) 7 28 17 Advances 26 6 12 13 Deposits - - - - Total assets 15 9 10 13 Source: Company, Axis Capital
13 17 JUL 2017 Company Report
Shriram City Union Finance Company financials (Standalone) - Shriram City Union Finance BANKS & FINANCIAL SERVICES
Profit & loss (Rs bn) Balance sheet (Rs bn) Y/E March FY16 FY17 FY18E FY19E Y/E March FY16 FY17 FY18E FY19E Interest earned 38.3 44.3 52.3 62.1 Total assets 208.5 245.4 293.6 345.7 Interest expended (13.8) (15.3) (18.5) (20.9) Cash & Balances with RBI 6.4 6.4 8.3 9.7 Net interest income 24.5 29.0 33.8 41.1 Investments 7.9 7.1 7.9 8.6 Non interest income 0.2 0.0 0.0 0.0 Advances 191.4 229.6 275.1 324.7 Net incom e 24.7 29.0 33.8 41.2 Fixed assets 0.8 0.8 0.7 0.6 Operating expenses (10.5) (11.4) (12.9) (15.7) Other assets 1.6 1.0 1.2 1.3 Staff expenses (5.1) (5.5) (6.2) (7.3) Total liabilities 208.5 245.4 293.6 345.7 Other operating expenses (5.4) (5.9) (6.7) (8.4) Equity capital 0.7 0.7 0.7 0.7 Operating profit 14.2 17.6 20.9 25.5 Preference capital - - - - Provisions & contingencies (6.2) (9.1) (9.9) (10.6) Reserves & surplus 44.5 49.6 55.6 63.9 Pre-tax profit 8.1 8.5 11.0 14.9 Networth 45.1 50.3 56.3 64.6 Tax expense (2.8) (3.0) (3.8) (5.1) Borrowings 144.1 170.4 207.4 245.6 Profit after tax 5.3 5.6 7.2 9.7 Deposits - - - - Extraordinary item - - - - Other liabilities & prov. 19.3 24.7 29.9 35.4 Minority interest/Associates - - - - Adj. P AT 5.3 5.6 7.2 9.7
Source: Company, Axis Capital
14 17 JUL 2017 Company Report
Company financials (Standalone) - Shriram City Union Finance Shriram City Union Finance BANKS & FINANCIAL SERVICES
Key ratios (%) Y/E March FY16 FY17 FY18E FY19E Per share data FDEPS (Rs) 80 84 109 148 BV (Rs) 684 763 854 979 Adj. BV (Rs) 639 700 711 835 DPS (Rs) 15 15 18 22 Dividend payout (%) 19 18 16 15 Yields & Margins (%) Yield on advances 22.0 21.1 20.7 19.1 Cost of funds 10.3 9.8 9.8 8.5 Net interest margin 13.5 13.4 13.0 12.3 Asset quality (%) Gross NPAs 5.1 6.7 9.4 8.8 Net NPAs 1.6 1.8 3.4 2.9 Credit cost 3.5 4.3 4.7 3.8 Provisioning coverage 69.7 73.3 63.8 66.8 Capital (%) Tier-I 23.4 22.3 21.3 19.7 CAR 26.1 23.9 23.9 22.1 Efficiency (%) ROA 2.7 2.5 2.7 2.8 ROE 12.3 11.7 13.5 15.1 Cost to income 42 39 38 38 CASA - - - - Effective tax rate 34 35 35 35 Growth (% ) Net interest income 14 18 17 22 Fee income - - - - Source:Operating Company, expenses Axis Capital 15 8 14 21 Profit after tax (5) 5 29 35 Advances 22 20 20 18 Deposits - - - - Total assets 16 18 20 18
15 17 JUL 2017 Company Report
Disclaimer Shriram City Union Finance BANKS & FINANCIAL SERVICES
Disclosures:
The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).
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16 17 JUL 2017 Company Report
Disclaimer Shriram City Union Finance BANKS & FINANCIAL SERVICES
DEFINITION OF RATINGS
Ratings Expected absolute returns over 12 months
BUY More than 10%
HOLD Between 10% and -10%
Disclaimer: SELL Less than -10%
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