IFCI at Rs 58…..Interest Reviving yet again…Rs 100 + inside a year ?

Several Times I had strongly recommended IFCI as a multibagger….. starting at Rs 16 in December 2006….It raced to Rs 130 levels as the Government called for bids to sell a Strategic Stake in it….A Joint Bid by Sterlite and Morgan fell through as the Government was not transparent on Conversion of Institutional Debt to Equity ……this would significantly have affected the Shareholding Break Up and diluted the Winning Bidders Holding…there was also Government reluctance to transfer Management Control

The Finance  Minister at the time,Mr Chidambaram had bravely stated that he will certainly revist IFCI strategic Stake sale at a later time and get even a higher Bid than the Rs 80-Rs 90 that was achieved at the time

IFCI quickly sunk and reached levels of even Rs 20 in the October 2008 and March 2009 Lows…this retracement wiped off Notional Gains build up in the Scrip….It has since moved up past Rs 45 levels and has surged in recent times….and is Rs 58 today….Can easily double from here too in the next six months on positive developments

The Interest in IFCI is now being revived….the key reason is that they are planning to apply to become a Bank once the new guidelines are announced…expected this month….The last to get permission were Yes Bank and Kotak Mahindra in 2002

In fact IFCI had pursued this route to convert to a bank way back in the 1990s along with IDBI,ICICI ,HDFC and UTI (now Axis Bank)….except for IFCI,all others had been given the green signal

IFCI was plagued for years with a high level of Non Performing Assets that had threatened to erode the Networth….In 2005/6 the NPA levels disclosed were Rs 3950 crs…I had even given it the Notorious Acronym of ‘I F….. the Country of India’ !

But in 2006/7 the revival and turnaround became clear…Real Estate,Investments and Recoveries spearheaded this…NPAs were brought down to a level of Rs 1366 crs….that’s why and when I recommended IFCI at Rs 16 as a SS 1 Scriptech Stock Select…It was beginning to turn around fast

Look at the latest Financials…..As at March 31,2010,the Equity (FV Rs 10) stands at Rs 738 crs ….The Networth is Rs 3152 crs giving a Book Value of near Rs 43…Standalone PAT is Rs 671 crs giving an EPS of Rs 9…a Dividend of 10% has been declared…so at Rs 58,it’s at a 6 + Earnings Multiple and a 1.3 Book Multiple…not expensive by any stretch

If it is successful in converting to a Bank…government would hold a soft corner this time around for many reasons…IFCI will easily flare to a 10 + earnings multiple and a 2 Book Multiple….this would mean that from the current Rs 58 the share Price will move to near and possibly over Rs 100 in the coming months…Assuming FY 11 PAT is even maintained at FY 10 levels it should take the Book Value past Rs 50

Aggressive Players can consider playing IFCI in the F & O segment too…The Lot size is 4000 Shares….If you are averse to paying Margins then choose to Buying Call Options rather than going long on Futures….. there is a 5% sunk cost for doing this as a near month July 29,2010 Call Option Premium at Strike Price of Rs 57.50 was last quoted on NSE at Rs 3….that’s a sunk cost of 5% or  Rs 12000 for a position of 4000 shares aggregating Rs 230000…your payoff begins when IFCI crosses Rs 60.50 in this month…this is very likely as Banking Guidelines are expected to be announced this month…..You can always rollover postions

Cheers !   

15 thoughts on “IFCI at Rs 58…..Interest Reviving yet again…Rs 100 + inside a year ?

  1. it may be childish.but sir i want ur knowledge.or tell me or guide me to get that.i am 30 years old.i want to get financial freedom atleast by 45 years.i am ready to be a student also but dont charge me.u even give me some assignment in such a way that i learn.
    it is not must that u must reply.its just my wish.

  2. alright Ramurthy…start with this simple data preparation…Take Larsen & Toubro and the Sensex…access bseindia site ….historical prices….begin from year 2000…in an excel sheet insert the closing levels for Jan1,June 30 and Dec 31 every year till date for both Larsen and Sensex…this should not take more than 2 to 3 hours…do it and sent it to me on my email gaurav@scriptechgroup.com….I shall guide you on what significant inferences can be drawn from this exercise

  3. Dear Gaurav,

    In case Govt. does not invite new bidders/disinvest & it does not get a bank license second time around too , then what would be IFCI’s fair value? Also could you please provide FY10 figures for NPA (%) & NIM margins (%)? Have they improvded vis-a-vis FY09?
    Lastly, do you & clients have stake in IFCI at CMP?

  4. Hi Swaroop….Yes Clients and us have exposure to IFCI for the past 3 to 4 years now….Check out the General Disclaimer on my Blog….Yet to Review IFCI’s Annual Report….but can tell you this..More than the possibility of a Strategic Investor coming in,it is the Potential of being coverted to a Bank that will surge IFCI to greater heights in the short term….if IFCI application,if and when made is rejected,it will then be treated just as another NBFC and it’s fair value will be based on It’s Earnings and Value (Market or otherwise) of it’s Investments adjusted for any Provisions for NPAs etc….Safe to assume,this is already factored into the Price currently….IFCI is awaiting Government Guidelines to consider to make the Application for becoming a Bank…Given my reading of circumstances,both historic and current,there is a more than Fair chance of IFCI succeeding this time around…that’s why the renewed interest in the markets for IFCI

  5. Dear Gaurav,

    Thanks for the clarification. I saw a report by ICICI Direct today which says NIM is around 1.8% & they too seem bullish on the stock with price targets of around 63.
    However, after some detailed study in my humble opinion i’d rather buy a bank like The South Indian bank which is quoting around 1.2 times FY11 book, has NIM around 2.4% & is a prime buy out /merger candidate & being a private bank has no ownership hassles. Also, bank has no known promoter with FII’s holding around 40% just a matter of time for value unlocking & i’d make an educated guess that the gains would be higher than from IFCI.
    Only thing which could ’cause further re-rating in case of IFCI is if management is changed i.e Govt. sells controlling stake but it has around 500+ convertible debt on its book which would cause significant dilution for new promoters. So Govt. needs to clarify this matter.
    Your thoughts on South Indian Bank?

  6. Dear Anand,

    I want the Government to get done with this Conversion sooner than later….I’m not unduly worried about it….even though it’s reported to be considering converting into equity at Par the Rs 500+ crores loans given years ago to IFCI for reviving….this means the Dilution of Capital to Rs 1200 + crs from the current Rs 700+crs….that’s a near Rs 10 EPS diluting to Rs 6….this may be the precursor to the Bank Conversion Plan…..I yet like IFCI ….even if conversion takes place at par as per the terms….debt becomes equity….that means networth moves up….Debt/Equity Ratio falls and gives IFCI a better leverage to raise more funds…I like IFCI…ofcourse Banking Guidelines are due anytime….govt is committed on this……in the past too from 2007 this debt to equity has been the controversy and govt has not taken a call on this yet…I cannot understand this?…either say ‘No’ it will always be Debt and let IFCI repay it over a fixed schedule or just convert it at Rs 10 !….

    Whatever I continue to like IFCI…even if the Bank Conversion does not materialize….the appreciation may then just take a little longer

    Cheers !

  7. Hi Sir, what is your outlook now on IFCI, though good resuts, decent divident, it is still quoting at 6PE multiple, would it reach 100 as per your guidance by thisyear end?

  8. Kalyan…IFCI is facing some sticky Lending situations…nevertheless it remains hovering between Rs 50 and Rs 60 awaiting a breakout ….this trigger should be applying for a Banking License…draft guidelines are just about to be declared..RBI may require a protective ring of a holding company for all applicants…as for reaching 100 in a year when i blogged in July 2010,this was protected by a ?…moreover the assumption was that guidelines would come out before Diwali last year…they have been delayed….holding IFCI requires conviction and patience…there seems little downside from here…Hold on

  9. Sadly Apoorva,RBI’s guidelines for new Banking Licenses are not fav for IDFC and IFCI…and hence the steep fall in their share prices…has come as a shock to them and also observers as the hints were clearly fav before these delayed guidleines were recently announced….IFCI has dropped to Rs 36…and as of date your Sept Call Option at Rs 45 for IFCI is a sunk cost for the premium you paid…..IFCI now cannot apply to become a bank and it is facing recoverability issues on many loans that have become sticky….howver i don’t see much downside from Rs 36…IFCI is below its Audited Book Value…there is a danger this Book Value may need some readjustment for losses on account of additional provisions for irrecoverable loans….your Sept Call option will lapse if Price remains below Rs 45…your loss is fixed at the premium you paid

  10. Bhupesh…IFCI at Rs 23 and 52 Week Low with a 52 Week High of Rs 75 appears scary….clearly it is battling with significant NPA Issues…this may see Book Value erosion on adjusting fully for such sticky loans….2012 is also going to be a very challenging year for Lenders…Scenario of High Interest rate,economy slowdown and rising NPAs is threatening this sector…However IFCI at Rs 23 could be a contarion play for the coming year and a mid term view…clarity and visibility on earnings and NPAs needs to be assessed well though

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