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SELL IDBI Stock – Will Underperform

December 25, 2006

Immediately after RBI awarded United Western Bank to IDBI in Oct-2006, DalalStreet.Biz recommended its readers to exit IDBI.

Macquaire Equity Research has now initiated coverage on IDBI Ltd with a UNDERPERFORM rating and a 12 month price target of Rs 65.00. The main reasons cited by Macquaire are,
IDBI is weighed down with a heavy burden of legacy, as it struggles with its large book of bad loans, manifested in the SASF bonds, and high cost borrowings. As a result, IDBI does and will continue to suffer from sub-normal NIM for quite some time.

The UWB acquisition is not enough. The UWB acquisition is unlikely to help matters significantly. While the added branches will be positive, we do not see it as being enough to sort out the bank’s problem with legacy highcost liabilities. Of course, hitches in integration could worsen matters.

IDBI already enjoys considerable government support, in the form of the SASF (stressed asset
stabilisation fund) and forbearance on statutory reserves. We do not see the bank being able to forego these concessions in the short term – most likely, the government is likely to extend these.

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