Is IDFC Ltd available at a significant discount from its default value?

Today’s headline read, “Bandhan Group-Led Consortium to Acquire IDFC (NS:) AMC for ₹4,500 Crore”

Well, that sounds like a big deal. To put some context, the IDFC mutual fund with around ₹1.25,000 crore of assets under management (AUM) is the 9th largest mutual fund in our country.

So how does this transaction benefit IDFC Ltd shareholders anyway? ?

IDFC Ltd. owns 100% of IDFC Financial Holding Company, which ultimately owns 100% of IDFC Asset Management Company and 36.6% of IDFC First Bank Ltd.

If we just add the market value from IDFC Ltd. in IDFC First Bank Ltd., at the current price, this is around ₹9,880 crore and if we add the value that IDFC Ltd. will receive from the sale of IDFC AMC, or ₹4,500 crore, the total implied value of IDFC Ltd. is expected to be ₹14,380 crore, while the current market capitalization of IDFC Ltd. is around ₹10,500 crore. Thus, due to this transaction, the implied valuations indicate that IDFC Ltd. is undervalued by nearly 35%.

There could be an argument that since the asset management business which is a profitable business will no longer be part of IDFC Ltd, therefore there should be a lower multiple assigned to the overall valuation of IDFC ltd. But the calculation above is a consideration of the pure sale plus the value of an already listed bank business, so there is no multiple involved for the remaining business.

Is this a fair transaction for the shareholders of IDFC Ltd. ?

IDFC AMC made a profit of around ₹144 crore for the year ending 2021, which values ​​this deal at around 31.25x P/E. If we compare this with its listed counterpart, HDFC (NS: ) AMC which is the 3rd largest AMC in our country, it is currently trading at around 37x P/E.

According to another metric of valuation, typically transactions in AMCs occur at around 3-5% of their AUM, in this case ₹4,500 crore (sell consideration) is 3.6% of 1.25,000 ₹ crore (AUM).

Overall, the deal appears to be fair, but at the lower end of the acceptable valuation range.