JP Morgan: IDFC- Stake sale in AMC at rich valuations

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IDFC 
Underweight
IDFC.BO, IDFC IN
Stake sale in AMC at rich valuations 


• Stake Sale in AMC: IDFC has agreed to sell 25% stake in IDFC AMC
to Natixis, a french asset management company. Media reports
(Economic times) indicate a transaction amount of Rs2.75bn for a 25%
stake valuing IDFC AMC at ~5.5% of AUMs.

• Richly priced: The stake sale at 5.5% of AUMs is richly valued
considering equity proportion of ~25% of AUM. Recent UTI stake sale
to T Rowe Price was concluded at ~3.5% of AUMs.Many other post
2008 transactions have concluded at <4% of AUMs.

• Positive for IDFC: (1) The stake sale is richly priced as IDFC had paid
higher valuations when it had acquired StanC AMC (~6% of AUMs) and
is better than valuations fetched in most recent deals (2) Strategically,
Natixis being a large asset manager would give IDFC AMC access to
global investors and also offer global investment products for existing
clients.

• No Change in fundamental view: The deal is positive for IDFC and we
believe that to some extent nets  off an expensive acquisition (StanC
AMC) done in 2008 but this does not change our fundamental view.
Volume growth is expected to remain strong over next 2-3 yrs but fee
income would not keep pace with balance sheet growth. Also given the
current tight liquidity situation and competitive pricing from PSUs,
IDFC could face big margin compression in the near term.