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IDFC’s investors cheer at prospect of reverse merger with IDFC First Bank

IDFC Ltd received a licence to set up a full service bank in 2013 and the infrastructure lending business was carved into IDFC Bank Ltd which began operations in 2015.Premium
IDFC Ltd received a licence to set up a full service bank in 2013 and the infrastructure lending business was carved into IDFC Bank Ltd which began operations in 2015.

  • The indirect stake in the bank gives IDFC shareholders a value of Rs72 per share, believe analysts at ICICI Securities. IDFC Ltd also has a mutual fund subsidiary, IDFC Asset Management Company Ltd

Investors of IDFC Ltd are an elated group. The banking regulator has given the financial services company green signal to exit as promoter of IDFC First Bank Ltd as the required lock-in period ended 30 September, 2020. Shares of the company have zoomed 19% today so far. IDFC First Bank shares too have gained roughly 3%.

Behind this cheer is the salivating prospect of a reverse merger of IDFC with the bank.

IDFC Ltd received a licence to set up a full service bank in 2013 and the infrastructure lending business was carved into IDFC Bank Ltd which began operations in 2015. IDFC Ltd holds stake in the bank through a full-owned non-operative financial holding company (NOFHL). The NOFHL’s stake in IDFC First Bank is 36.6% after the latest round of qualified institutional placement (QIP) of shares.

A reverse merger would entail an exit from a holding company structure by the bank. Analysts believe this is possible as IDFC First Bank does not have any subsidiaries. Rules require a bank to be held by NOFHL if it has other operations besides lending.

Notwithstanding a rocky start five years ago, IDFC First Bank has morphed into a retail lender and moved away from an infrastructure heavy book. The merger of IDFC Bank with Capital First Ltd in 2018 helped the lender fix its wholesale credit heavy balance sheet and tackle legacy bad loans. The bank reported a net profit of 128 crore in the March quarter, a 79% year-on-year jump. Shares of the bank have gained more than 95% in the past one year as the bank exhibited good recovery despite the pandemic.

With this gain, IDFC First Bank’s market capitalisation stands at Rs32, 585 crore, while promoter IDFC Ltd's valuation is roughly Rs8,400 crore. The expectation of such a reverse merger reduces the discount given to the value of the holding company IDFC Ltd.

Analysts at ICICI Securities Ltd believe that the indirect stake in the bank gives IDFC shareholders a value of Rs72 per share. IDFC Ltd also has a mutual fund subsidiary, IDFC Asset Management Company Ltd. “Assigning a value of 3.5% AUM or 25x PE for its asset management arm, fair value for IDFC AMC would be Rs40bn ( 4000 crore)," they wrote in a note.

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