Multi Baggers

IFCI : A Short term opportunity and long term rerating candidate

About IFCI:

IFCI's activities include project financing, infrastructure development, underwriting & loan syndication, venture capital, stock broking & merchant banking, factoring, asset reconstruction, tourism finance, corporate and infrastructure advisory, technical consultancy and management education.

Key Triggers

IFCI management is focused on three areas of importance.

Reducing cost of funds.

Reducing risk and deleveraging the balance sheet and exiting non-core businesses.

1. Sale of Stake in NSE : Currently  CEO & MD  Malay Mukherjee has said stake sale of NSE will be completed by 30th September: IFCI passed resolution to sell 2.5% of its  total 5.44% ownership in the bourses . In recent interview management hinted that stake sale will be completed by 30th of September this is going to see cash inflow of anywhere between 500-600 crores.

2. IFCI through its subsidiary Stock holding owns another 5% in the bourses. Thus if they eventually exit the entire holding

3. IFCI could get as much as over 2000 crore alone from the stake sale

4. IFCI to partly exit Tourism Finance as per latest announcement

5. IFCI to sell stake in IFCI financial services

6. After this there is stake in MCX which we feel will also be sold eventually it owns approx 200 crore of MCX shares

Why there is protection on downside? Look at the investment holding value + non quoted investments in the balance sheet of IFCI it gives lot of comfort. As per media report IFCI owns 12000 crore worth of investments compared to 5800 crore of market cap as per closing price of 34.5 and management will monetize partly of the investments thus taking pressure off the balance sheet.

Apart from this it owns substantial land bank both industrial commercial.

The strategy IFCI is working is simple. Reduce burden on balance sheet. Government will infuse capital in the company as per media reports when that happens the stock will see a lot of cash coming in over next 4-6 months both in terms of non core asset sale NPA recoveries and capital infusion. This all points out to one direction either the company will be merged with some other public entity if government do not infuse capital likes of IDFC LIC or else it will be working not as an NBFC but as a banking firm once fresh guidelines are issued.

If you believe the bull run is set to start there could be few points here this could be the strategy that you should follow just like our old pick IOB.

Small Investors can invest directly, Future and Option traders can work with a range of 32-45 over next 6 months. Combine the power of options the range If it spends anywhere between 39 avg over next 6 months aggregate return will be 25-30% plus and the news that are in store we feel one should definitely be biased on positive front.

If stake sale accompanied by NPA recoveries and good profit growth due to lower cost of funds is reflected in the quarterly result of Sept 30th2014 one can extrapolate the full year EPS to be close to 4.5. This will be a game changer for the stock from valuation perspective.

The worst is behind them and smart move can re-rate the stock though not significantly but who will complaint if the stock gives return of close to 25-30% by March 2015 by way of hedging and possible rerating if strategy augurs well 

Alert keep following things on checklist if you want to invest in IFCI:

NSE stake sale news should come by 30th Sept  Oct 6 -7 the stock should be re-rated. We expect the stock to give a technical breakout of 38.5 once the stake sale completion is announced. Last time stock ran close to 10-12% when they wanted to sell the stake. So on completion we expect that levels to be tested again. This gives you approximately 10-12% return expectation if our calculation goes well. After that small investors can put a stop loss as per risk appetite and option traders hedgers can use the strategy of selling call buying  put depending on direction. We maintain target of close to 45 on the stock discounting it with a PE multiple of 10 times and considering adjusted PE of close to 6 times.

Risks are always associated with stocks, we have cited the positives but lot is dependent on government policies and management outlook & performance. Also if the time deadline as talked by management does not result in outcome one has to exit the stock. We sense a short term trade and medium term investment opportunity on the stock.