Buy This Mid Cap Banking Stock For 40% Potential Gains, Stock Surged Nearly 20% In 1 Week

Arihant Capital Market Limited, a leading brokerage firm in its recent report on IDFC First Bank, a private sector bank, has suggested buy for a target price of Rs 59/share. The brokerage is bullish on the stocks of the bank. 1QFY23 performance witnessed a strong performance with improvement in asset quality according to the brokerage firm. IDFC First Bank has reported strong performance during Q1FY23 with strong core operating profit growth of 64% YoY/18% QoQ to Rs 987 cr, driven by strong NII growth. Considering this, it has the potential to gain 18% in 12 months if stocks are purchased at the Current Market Price.

Stock Outlook & Returns

The Current Market Price (CMP) of stock is Rs 42.60/share, opened at Rs 42/share, while the previous close was Rs 41.95/share. Currently, the stock is trading Rs 32.65 above its 52-week low levels and Rs 10.9 below its 52-week high, respectively. The stock's 52 week low is Rs 28.95/share and 52 week high is Rs 53.50/share, respectively.

IDFC First bank is a Mid-cap bank having a Market Capitalization of Rs 26,679.88 crore. TTM EPS is 1.99. PE Ratio is 203.10, which is 10 times higher than its sector PE ratio of 23.90. ROE is 0.62%.

The stock of the bank in the past 5 years performed well and delivered mixed returns. In the past 1 week, it gained 19.64% and 32.25% in the past 1 month, respectively. In the past 1 year, the share slid down by almost 17.74% and moved up roughly 3.14% in 3 years, respectively. In the past 5 years, the stock slid down nearly 26.91%.

Q1FY23 Results

IDFC First Bank has reported strong performance during Q1FY23 with strong core operating profit growth of 64% YoY/18% QoQ to INR 987 cr, driven by strong NII growth. Funded asset growth was strong at 21% YoY/7% QoQ, driven by robust growth in retail assets at 40% YoY/10% QoQ. The collection efficiency in early-stage bucket (urban retail) has increased from 98.9% pre-covid to 99.4%. At bank level, asset quality improved with GNPA/NNPA decreased by 34bps/23bps QoQ at 3.4%/1.3% respectively. Retail GNPA reduced from 2.6% to 2.1% QoQ and NNPA reduced from 1.1% to 0.9% QoQ. Management remained firm on its guidance to reduce retail GNPA/NNPA at <2%/1% respectively. NIM declined by 24bps QoQ at 5.95%, driven by 31bps increase in cost of funds supported by 26bps increase in yield on advances. However, NIM remained in the range of ~6%. Bank has utilised covid provision of INR 75 cr during the quarter and carries provisions of INR 90 cr as of Q1FY23.

Core operating performance was strong

NII increased by 26% YoY/3% QoQ to INR 2,751 cr, driven by strong growth in advances. Other income increased by 2% YoY/3% QoQ to INR 856 cr. Bank has reported treasury loss of INR 44 cr as compared to gain of INR 393 cr in Q1FY22. Bank has reported profit of INR 474 cr as compared to loss of INR 630 cr in Q1FY22 and profit of INR 343 cr in Q4FY22. Provisions declined by 84% YoY/17% QoQ to INR 308 cr. Credit cost for the quarter was at 0.9%. Management continue to maintain its credit cost guidance of ~1.5%.

Advance growth continues to be driven by retail assets

Total funded assets of the bank increased by 21% YoY/7% QoQ to INR 137,662 cr, continued to driven by retail (across the portfolio) and commercial finance segment (~74% of the total portfolio). Retail portfolio grew by 40% YoY/10% QoQ while wholesale funded assets book (26% of portfolio) declined by 9% YoY/1% QoQ. Within retail, Home loan segment growth was robust at 61% YoY/9% QoQ. Card business of the bank increased strongly by 183% YoY/15% QoQ. Within wholesale, infra book decreased further by 35% YoY/2% QoQ and corporate (non infra) book increased by 12% YoY/1% QoQ. Commercial finance book (8% of portfolio) increased by 13% YoY/5% QoQ at INR 10,679 cr. Management expects the growth momentum to continue, going forward and is confident of growing the loan book by ~20-25%. CASA ratio of the bank increased from 48.4% to 50% QoQ. Total deposits growth was at 24% YoY/7% QoQ.

Asset quality improved further

Bank continue to report improvement in asset quality as GNPA declined further by 34bps QoQ at 3.4%. Excluding the NPA in the infra financing book which will run down in due course, the GNPA/NNPA of the bank would have been at 2.4% and 0.8%. Corporate infra GNPA was higher at 21.7% vs. 21.6% QoQ. Corporate noninfra book GNPA increased from 2.8% to 3.7% QoQ as one retail chain account with an exposure of INR 575 cr has slipped into NPA against which 100% provision has been made. The overall restructured book reduced to 1.3% of the funded assets as against 1.8% QoQ.

Valuation & View

Bank has delivered a strong performance during Q1FY23 on most of the counts with improvement in asset quality and return ratios along with strong business growth. Management sounded confident of delivering strong growth in loan book with an aim of delivering double digit RoE. However, due to lower provision buffer, we expect the credit cost to remain elevated going ahead and expect bank to deliver RoA/RoE of 0.8%/9% by FY24E driven by strong credit growth. "We maintain our Buy rating on the stock with a target price of Rs 59 (unchanged), based on 1.5x P/ABV to its FY24E," the brokerage said.

Disclaimer

The stock has been picked from the brokerage report of Arihant Capital Market Limited. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.