time for IDBI to leave the nest?
in its budget, the Indian government has set a goal of divesting ₹1.75 lakh crore in FY22. with that in mind, it’s eyeing complete or partial exits from the likes of ITC, Air India, LIC, and more. among those on the list is the Industrial Development Bank of India (IDBI), in which the government and LIC hold a combined stake of over 94%.
from an overall perspective, the government needs to raise funds to make up for its loss of income and increased expenditure due to the pandemic. one way to do this would be to raise taxes on businesses, individuals, and more. however, businesses are suffering from the pandemic as well, and cannot bear the additional burden. hence, the government is looking to raise capital by selling its stake in many companies.
looking at IDBI in particular, the bank has a pretty serious bad-loan problem. in 2019, it had India’s worst bad-loan ratio, prompting a takeover by the LIC and multiple bailouts totaling over ₹30,000 crore from the LIC and government coffers.
all this attention has brought a turnaround in IDBI’s fortunes. its bad-loan problem is much less severe now. its Q1 FY22 results showed a 318% jump in net profit over the corresponding year-ago period. this was largely due to the recovery of ₹733 crore owed by Kingfisher Airlines through the sale of United Breweries shares. this also resulted in a 63% increase in its ‘other income’ at ₹1,639 crore over the same period.
its bad-loan ratio is expected to further decline with an increase in the denominator, i.e., growth in the overall loans on the bank’s book. with the transfer of stressed accounts aggregating to Rs 7,000 - 8,000 crore to the National Asset Reconstruction Company Ltd, IDBI MD and CEO Rakesh Sharma expects the ratio to dip below 15% from the present 22.71%.
IDBI is a publicly traded company, so it’s straightforward to get a fair estimate of its value. the stock is currently trading around a price of ₹38 per share, which translates into a market value of over ₹41,000 crore for the company.
seven firms, including Deloitte, Ernst & Young and KPMG, have bid for the role of transaction advisor for the sale. by exiting its ~45% stake at that valuation, the government will hope to recoup over ₹18,000 crore or close to 10% of its divestment target for the fiscal year.