IDFCFIRSTB

: Equity Dilution Continues Amid Profitability Challenges

has completed another round of fundraising, worth ₹2,623 crore, through the issuance of compulsorily convertible cumulative preference shares (CCPS). This recent dilution, along with previous rounds, has significantly increased the number of equity shares, raising concerns about value erosion for existing shareholders. → Continuous Equity Dilution: The bank allotted 437 million CCPS to a subsidiary of Abu Dhabi Investment Authority. This follows a previous allotment of 812 million CCPS to a Warburg Pincus affiliate in August. The number of equity shares will increase by 17% to 8.6 billion, an almost 80% increase since FY21. While the book value per share will see a minor increase, the frequent dilution has become a pattern. → High Cost of Growth and Bad Loans: Although the bank's loan book has grown at a compound annual growth rate of 22% over the last five years, this growth has come at a high cost. The bank's equity capital has been consumed by a surge in credit costs, which jumped from ₹1,660 crore in FY23 to ₹5,510 crore in FY25, largely due to bad loans in the microfinance segment. This has severely impacted profitability, with FY25 net profit dropping nearly 50% year-on-year to ₹1,525 crore. → Profitability and Return Ratios: Despite expectations of an 80% surge in net profit to ₹2,743 crore in FY26, the bank's return on average assets (RoAA) is projected to remain a meager 0.7%, a figure lower than some public sector banks. The stock has underperformed the Nifty Bank index over the past year, reflecting investor concerns. The stock's current valuation is considered adequate, making a sharp upswing unlikely in the near term.