Would you be better off buying IDFC Limited rather than IDFC Bank? Dipan Mehta answers

“IDFC First Bank has faced many challenges. The integration was quite tough and many surprises were there when IDFC got merged. The bank has a very aggressive management and strong technology platform which I would say is available at reasonable valuations,” says Dipan Mehta, Director, Elixir Equities

Which will be the leader when it comes to the entire financial space? This year, HDFC Bank has done pretty much nothing and is down almost 4-5% while the likes of Federal Bank, Axis Bank, IndusInd Bank have been the clear leaders. What would be your bet in this space?
HDFC Bank certainly has underperformed, not only this quarter, this year but for the last almost three years, I would say HDFC Bank has been an underperformer for 1,000 days. It is partly to do with slower growth rates, partly with change of management which of course was quite smooth and now there is the uncertainty surrounding the merger of these two giants but I am pretty confident 12-18 months down the line, when the merger process is over and you have a consolidated entity, it should be able to grow at or above market rates and investors start to pay a premium for that business which at present is going at market multiples or slightly lower.

I am very confident about HDFC and HDFC Bank. They cannot underperform for so long as they have an industry which is really shaping up and growing pretty well. But for the time being, even Axis Bank, ICICI and even Kotak may give better returns over the medium term and then, of course, there are the NBFCs.

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I am very positive on Bajaj Finance and Cholamandalam also which could do very well or the more risk-oriented investors of these microfinance companies who do exceptionally well when the economy is doing better. So CreditAccess Grameen looks pretty decent and Bandhan Bank also has a large exposure to microfinance. They may also report decent earnings going forward and so there are lots of choices as far as banks and NBFCs are concerned.

Again depending upon the risk appetite horizon of investment, one has many choices but I am very certain that of the top three-four banks within India, one or two should be in core holdings accounting for 5-7% of the total portfolio value.

Can you guess the stock which will make you happy the most? I know it.
I am sorry because there are so many stocks which make me happy...

Is IDFC First Bank making you happy?
Yes of course.

Just happy or very happy?
The way the company has shaped up and there were so many challenges, the integration was quite tough and many surprises were there when IDFC got merged. Their entire corporate loan book of IDFC had deteriorated even more than what investors expected but all of the provisioning is totally done with and the way they have gone after increasing their CASA ratio and managing their retail franchise and keeping the NPAs low on the retail side is very noteworthy. It has a very aggressive management and strong technology platform which I would say is available at reasonable valuations.

So, this business is shaping up pretty well and with usual disclosure, we and our clients are invested. We have a very positive view on the company. The next three-four quarters will surprise analysts as far as the reported numbers are going and it should be much better than what the Street is expecting.

Is one better off buying IDFC Limited rather than IDFC Bank because the merger ratio is not out and we know that the regulatory approvals, all the necessary preconditions are in place? So for someone who really wants to buy into IDFC First Bank, do you think IDFC Limited gives a better entry point?
Yes absolutely. You are right there is definitely an arbitrage opportunity in IDFC and IDFC First and if you want to get into IDFC First Bank, buying shares of IDFC may give a slight maybe 4-5% price advantage because I also feel that the ratio will be slightly in favour of IDFC shareholders rather than IDFC First.

I think it is a marginal benefit and both these companies eventually are going to be under one entity, one listing and you could buy either of them. Both have great prospects going forward and as I said, it is one of the best picks amongst the new generation private sector tier II banks.