I decided to value Federal Bank due to its recent tie ups with neo banks and fin-tech startups. It has been trying to gain market share and make headway into the urban millennial segment through this inorganic growth.
Numbers and Narratives
Federal Bank is an up and coming bank still very much in its growth phase, it’s fuelling that growth in part by tying up with neo banks (fin-tech companies). I expect it to grow faster than its current rate in the next 5 years and its margins will suffer because of that. I expect its margins to normalise to industry average after the first 5 years.
The core numbers that I arrive at based on the story are
- Compounded revenue growth for next 5 years = 15% (13% historical)
- EBIT margin in year 5 = 15% (~15% industry average)
- Initial cost of capital = 12.28%
Valuation
I’ve used the above numbers along with the financial information to compute my DCF valuation for Federal Bank as seen below.
As you can see, the valuation price came out to ₹163.90, about 85% higher than the last traded price of ₹88.05.