Date : 12 Sept, 2024
Fundamental Analysis, DCF Model and article written by Rishabh Jain.
Fundamental Analysis :
Size of Company
- Total Market Cap of company is around 55 Thousand Crores. Which is relatively small for a Bank which means there is significant room for growth in upcoming decades.
- Total Retail Deposits of the Bank are around 2 Lakh Crores, which have increased in last 5 years significantly from around 40 Thousand Crores in 2019. Again 2 Lakh Crores of total deposits is relatively small number compared to overall Deposits in Banks in India which is around 280 Lakh Crores (Including all Public and Private Banks).
- This increase in Retail deposits also helped the Bank with decrease in Cost of Funds by around 1.4% , by repaying Legacy Loans it had since 2019. So overall Profitability of the Bank has significantly improved and will (Most Likely) remain profitable from here on out.
Capitalization Structure
- Banking Industry is highly leveraged in general for obvious reasons that it makes money by using Deposit Money and giving it at higher interest rate as Loans of various kinds. IDFC First Bank has D/E ratio of 7.79, and Financial Leverage of 8.31.
- This is farely comparable with D/E ratio of HDFC Bank 6.81, and Financial leverage of 8.31.
- Interest Coverage ratio of company is around 1.25, which is fine for a bank but slightly lower than its Peers, and can be improved.
Valuation
- P/E Ratio of the company is around 19.1, which is comparable with its peers in Private Bank Industry, but slightly higher.
- This can be due to the fact that company is growing fast, Improving its market share, Growing deposits. So Investors are more optimistic about its future prospects.
- Book Value per share of the company is around 45 rupees, its face value is 10, Graham Number is around 65, and Market share Price is around 74. And the Net Current Asset Value per share (NVCAPS) is around 14.5.
- According to Benjamin Graham, this share would be considered slightly overvalued because he never recommended Investor purchasing stock at P/E over 16.
- Last Fiscal Year’s Return on Equity was around 10.1%, while 5 years average Return on Equity was around 3% (Per annum).
Discounted Cash-Flow Model Summary
- Weighted Average Cost of Capital (WACC) Came out to be around 9.3%. Which is alright for the Bank, and I expect it to decrease further in future years, which can further increase DCF Value.
- Range of Intrinsic Value per share of IDFC First Bank came out to be around 116-139 Rupees, in Base Case Scenario. This Valuation Model, Relied Heavily on Terminal value (80%) and less on 5 years Cash flows (20%). Because according to my analysis, this company has lot of room to grow further in later decade as well.
- For further details of DCF Model, download and go through DCF Model (Excel file) below.
Management
- The CEO of the company, Mr. V. Vaidyanathan, holds significant amount of his personal wealth in the comapany as Shareholder. Which is considered good for the comapany, because Management will think of growing Shareholder Value rather than just growing their own Salary in the Long term. Infact many companies which return great shareholder value in long term is done by Management with “skin in the game”, i.e, being major shareholder themseleves.
- Many employees of the company are also using their Stock options with their salaries which is also a good sign. Only when company is doing great and expecting growth does employees of the company buy shares in it. Just this year in 2024, Around 15 Lakh new shares were issued for Employees. Insiders Buying shares in their own company is always considered a positive sign, since they would know more about Company’s current situation and growth prospects than outsiders.
Discounted Cash Flow Model
Cases And Assumptions :
| Cases | 1 | 2 | 3 |
| Revenue Growth(%) | 21 | 19 | 17 |
| Operating Expenses (% of Revenue) | 67 | 67 | 70 |
| Employee Expenses (% of Revenue) | 15 | 16 | 17 |
| Current Liability Growth (%) | 24 | 21 | 18 |
| Terminal Growth (%) | 3 | 3 | 3 |
DCF Model Excel File
Excel File Includes:
- Forecasts on Revenue, COGS, R&D Expenses, Depreciation& Amortisation
- Forecasts on Current Assets & Current Liabilities
- Calculation of Working Capital, CAPEX, Free Cash-Flows.
- Calculation of Weighted Average Cost of Capital.
- Calculation of DCF Intrinsic Value per share of the company.
- Added Graphs for Visualisation of the data.
Disclaimer :
This DCF Model is for Educational and Research purposes ONLY. The DCF model was based on several Assumptions, and it doesn’t Guarentee it will happen in future. This is not in any form a Financial Advice. Do your own Due-Diligence for Investing.
For more details visit our Legal Page –https://r1hedge.com/legal/
Pingback: Fundamental Analysis of Canara Bank, DCF Model | R1Hedge - R1Hedge