Will de-merger of IDFC into bank lead to big re-rating?

Second, the existing company will become an holding company. So, the SOP of both the companies put together makes us feel that a price of around Rs 170-175 is not impossible. It may not be immediate but slightly in the medium-term. However, overall it looks that this is a stock which gradually more and more people will try to acquire.

Anuj: Do you believe that it could be an outperformer just like it has been today for better part of next six months or so? Mehta: Though the short-term does not look as promising but what we feel is that given the management pedigree that IDFC carries as well as the exposure that IDFC has got to the infra funding norms as well as the execution capabilities of the management are unquestionable. During the difficult times in the last three or four years, when they were able to protect their asset quality as well as increase their loan book size, I don’t think any reason is there to worry in the next two or three years when government as well as Reserve Bank of India (RBI) both will support the infrastructure lending norms. As a bank it would get more access to funding, the steps that it has taken in the last few days, a Rs 1000 crore QIB being successful, a Rs 1000 crore of asset selling on the real estate side. I think all this will give tremendous boost to creating its banking infrastructure as well as its loan book. Sonia: Dilip said that he won’t be surprised to see a Rs 170-175 level on the stock very soon. I guess that is in the medium-term but what would the longer term target be for you on IDFC if someone has to enter now? Mehta: We have a medium-term target of Rs 164-165 for the stock. However, having said that there surely seems to be a re-rating on the cards given what the management has indicated in the last couple of days. Demerger would also unlock value for IDFC. So, I feel a conservative price target would be somewhere around Rs 200 which would make it trade at around 2.3-2.4 time price to adjusted book and given the core competence that IDFC holds in 1.5 year Rs 210-220 seems quite possible.

Anuj: What is the key risk to your call on that price target that you spoke about for IDFC?Bhat: I think currently if you see the capital adequacy ratio post the QIP is almost about 24-25 percent. So, consequently your return on equities (RoEs) are pretty low and maybe the return on assets (RoAs) are slightly better because they have got a lot of free money to use; in the sense there is no cost to it. As they get into the banking mode, you will have the GSECs also which they will be having as an investment; overall it will still not consume a lot of capital. So, they will be having enough capital and the RoEs particularly will take a lot of time to move up. It will take maybe three to four years. So, in that sense a low RoA is something which is not very great news in terms of a tailwind to the IDFC story. So, that is a risk which will keep the stock price movement upwards but in a gradual way. Sonia: What about the other stock recommendations because this is a market that is hungry for ideas? At this point anything and everything is moving up but if you had to sift the wheat from chaff and tell us about some good investment recommendations now what would top your list? Bhat: As the way the markets have moved up, clearly most of them are much ahead of the fundamentals because the fundamentals are yet to work out. If you have seen most of the results that have come out in this particular quarter so far, barring for a few most of them have either met the expectations or none of them have gone in for revision of their guidance in any big way. So, given that one has to be a little cautious as to how you proceed further. So, within that space I would still say something like Tata Chemicals looks pretty good, IDFC is a stock which one can think of buying and on the cement space it would be something like a Gujarat Ambuja or ACC which still looks pretty interesting and maybe something like a Reliance Industries, GAIL or a HPCL on the oil and energy side.