IDFC Ltd - Steady core operating performance; limited upside - KR Choksey

IDFC delivered another steady quarter with healthy consolidated PAT of Rs 382 cr against our estimate of Rs 355 cr, growing 19% y-o-y driven by healthy NII growth and higher than expected non interest income. NII increased 19% y-o-y and 10% q-o-q to Rs 546cr aided by infrastructure NII which grew 19% y-o-y and sharp uptick in treasury NII (55% up y-o-y). Approval and disbursement were down 41% and 45% y-o-y respectively reflecting sharp slowdown in infrastructure financing space mainly in power sector. Core non-Interest incomes were muted on account of balance sheet slow down and weaker capital market linked business' revenues. However, trading gains again increased smartly to Rs91 crore primarily on account of profit on stake sale in AMC (Rs 80 crore). Asset quality remained healthy; gross NPA and net NPA stood at 0.3% and 0.1% with total provision on assets at 1.6% of assets. Recent strong rally (31% up in one month) in the stock leaves limited upside from levels hence we downgrade from BUY to HOLD with TP Rs150.

Core operating income up 15% y-o-y led by healthy NII growth and trading gains:

Net interest income showed healthy growth of 19% y-o-y aided by infra NII (8% Q-o-Q) and sequential sharp uptick in NII from treasury (24% Q-o-Q). Strong loan growth, sharp jump in treasury NII and improving spreads helped to show strong NII. Lending business contributed ~ 72% of operating income during the quarter, whereas the share for noninterest income declined from 44% to 28% in Q3FY12 on the back of one off in capital gain recorded in Q2FY12. Non-Interest Income grew only 7% y-o-y driven by better than expected trading gains. Fee income asset management, IB, securities broking remained subdued reflecting poor capital market conditions. We expect net interest income to grow 11% CAGR over FY11-13E driven by steady loan growth.

Stable lending spread q-o-q

On rolling 12 month basis, core lending spread improved 10bps to 2.4% primarily on account better liability management and steady asset yields. With diversification of liability franchise and improving competitive landscape, we expect IDFC to sustain core lending spread at 2.3-2.4% going forward.

Loan book growth rebounded to 25.3% y-o-y & 11.7% q-o-q:

Cumulative gross approvals and gross disbursement declined by 41% y-o-y and 45% y-o-y respectively on the back of higher interest rates, challenging macro environment, concerns in power sector. Loan book saw strong rebound growing 25.3% y-o-y and 11.7% q-o-q to Rs 43,897 cr driven by refinancing opportunity in telecom and transportation sector which contributes 46.2% of total outstanding disbursement. We believe that IDFC's strategy to slowdown balance sheet growth and focus on profit growth is better proposition in current macro environment. We expect infra loan book to grow 18% CAGR over FY11-FY13e driven largely by road sector and telecom.

Valuation & Recommendation: IDFC has delivered strong bottom line led by steady core lending performance and healthy in capital gains. Asset management, broking and investment banking continued to show weaker performance reflecting overall operating environment. We have maintained our FY12 and FY13 estimate. We expect IDFC to deliver 17% CAGR in earnings over FY11-13 driven by core operation. At Rs134, the stock is trading at 1.5x FY13 book and 11.2x FY12 earnings. We believe integrated business model, strong management capabilities, healthy return ratios, well capitalized and strong domain knowledge and healthy asset quality are key investment arguments for IDFC. The stock saw 31% up move in last one month, leaves limited upside from current levels, hence we downgrade our investment rating on the stock from BUY to HOLD with TP of Rs150.

Source : Equity Bulls

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