What are investors so excited about IDFC

It is not often that you see IDFC rallying 19% in a single day, but in the last few days, the stock has been on an absolute run. It even scaled its 52-week high price level and touched Rs.62.60 on 22 July. 

IDFC was originally conceived 25 years ago to bankroll India’s infrastructure thrust. In 2014, IDFC got the banking license after which it hived off its infrastructure lending business into IDFC Bank, which commenced operations in Oct-15.

The rally gathered momentum after IDFC confirmed that it was eligible to exit its stake in IDFC First Bank having completed 5 years. Earlier, RBI had clarified that holding companies could exit their banking units, five years after the banks commenced business. 

Since IDFC First Bank had commenced operations in Oct-15, IDFC was officially eligible to exit its stake in IDFC First Bank. IDFC Bank had merged with Capital First in 2018 to form IDFC First Bank.

IDFC currently holds 36.6% in IDFC First Bank through its 100% holding in IDFC Financial Holdings. IDFC also holds 100% in IDFC AMC. However, it must be noted that IDFC has not expressed its intention to exit IDFC Bank. So, what makes markets so excited?

Markets are excited about IDFC for 3 reasons. Firstly, this would mean that the group would be able to engineer a reverse merger of IDFC into IDFC Bank, which is likely to substantially value accretive. 

Secondly, the merger of IDFC into IDFC Bank does away with the need for the parent to systematically reduce its stake in the bank as per RBI regulations. Finally, this merger will ensure that IDFC is not subjected to the traditional holding company discount any longer. That is what, perhaps, excited markets the most!