ONGC shares surge 5% post Jefferies’ buy call, targeting Rs 390.

Jefferies anticipates robust free cash flow and reduced consolidated net debt with profitable production growth during FY 24-26, citing improved profitability from crude and gas pricing reforms above past decade averages.

Jefferies starts covering IDFC First Bank, rating it ‘buy’ with a ₹100 target price, suggesting over 15% potential upside from April 10’s ₹84.71 closing price.

The brokerage notes IDFC First Bank’s enhanced deposit franchise, expecting operational efficiencies by H2FY25. Strong deposit growth over FY24-27 should support loan growth, driving a 28% EPS CAGR despite rising credit costs. Improved ROA (to 1.5%) and ROE (to 14%) may lead to rerating, especially benefiting from rate declines. Capital-raising ability is crucial. Initiation coverage with Buy rating, PT ₹100.

Jefferies observed strong earnings growth and profitability improvement in the lender, anticipating a re-rating due to reasonable valuations at 1.5x FY25 adj PB. IDFC First Bank’s capital-raising ability is pivotal, considering its relatively lower CET1 CAR at 14%, lower ROE, and higher loan growth. Jefferies includes two capital raises in FY25 and FY27 in its assessment.

Stock Price Movement

IDFC First Bank stock surged 52% in the past year but dropped 5% YTD 2024, posting negative returns in 3 out of 4 months. April saw a 12% rise following declines of 7%, 4%, and 5% in March, February, and January 2024, respectively.

The stock is 16% below its peak of ₹100.74 on September 5, 2023, and 58% above its 52-week low of ₹53.35 on April 12, 2023.

Basis for Investment

Comprehensive banking services and top-notch deposit franchise: The brokerage noted that IDFC First Bank has developed a comprehensive banking platform catering to diverse clientele and products, supported by robust technology and competitive rates. Its strong appeal among urban customers facilitated the mobilization of over ₹50,000 crore in retail deposits from March 2021 to December 2023 (30% CAGR). Additionally, Jefferies highlighted IDFC First Bank’s rapid growth, particularly in retail, rural, and SME lending, along with diversification of corporate lending beyond infrastructure loans.

Anticipated 28% CAGR in deposits supporting 22% in loans

Jefferies forecasts robust deposit mobilization at IDFCFB, expecting a 28% CAGR in deposits during FY24-27. This growth will aid in facilitating bond repayments from former IDFC Limited and contribute to loan growth. The brokerage predicts reduced cost pressures as high-cost bonds decrease from ₹13,600 crore to ₹300 crore by March 2026, allowing for lower deposit rates post FY27. Despite an anticipated moderation in credit growth from the current 25% (as of Q3FY24), a healthy 22% CAGR in loans is projected for FY24-27, driven by retail, rural, and SME sectors. Jefferies also envisions a decline in the Loan to Deposit Ratio (LDR) from 102% to 90% by FY25 and further to 84% by FY27.

Drivers of earnings growth and profitability starting from 2HFY25

The brokerage expects an earnings improvement in 2HFY25 due to operational efficiencies, FLDG cost absorption, high-cost liabilities repayment, and credit card platform break-even. For FY24-27, it sees various drivers for earnings growth: asset growth, potential margin expansion (>20 basis points), 10 basis point fee-to-asset ratio increase, and a 700 basis point cost-income ratio decrease to 66%. Additionally, it accounts for a credit cost rise from 1.3% in FY24 to 1.8% in FY27, reflecting higher retail loan share and credit cycle normalization. These could drive a 28% EPS CAGR, 30 basis point ROA expansion to 1.5%, and 300 basis point ROE rise to 14%.

Potential Positive and Negative Scenarios

Positive: With a target price of ₹109, indicating a 29% upside, the brokerage assumes: a loan CAGR of 24% (FY24E-27E); NIMs around 6.6% (avg. FY24E-27E); and GNPA at 1.8% and NNPA at 0.5% in FY25E.

Negative: With a target price of ₹71, suggesting a 16% downside, Jefferies assumes: a loan CAGR of 20% (FY24E-27E); NIMs around 6.2% (avg. FY24E-27E); and GNPA of 2.2% and NNPA at 0.9% in FY25E.

Conclusion

Jefferies holds a favorable outlook on IDFC First Bank, pointing to various factors supporting its perspective. The bank is poised to maintain strong deposit growth, increasing the proportion of lower-cost deposits in its funding mix. Anticipated growth in rural, retail, and SME sectors is expected to enhance yields and expand margins. Scale advantages are foreseen in the coming years, contributing to a reduced cost-to-income ratio as prior investments, especially in areas like credit cards, yield results. Furthermore, the bank’s proven track record in managing retail asset quality across economic cycles is emphasized as a significant strength, likely aiding effective control of credit costs.

You might also be interested in: Trading Halt as Chinese Cement Maker’s Shares Plummet 99% in 15 Minutes