IDFC - Asset quality better, operating cost in check; Buy - Anand Rathi

Lending business moderates, spreads stable. Loan growth was modest (21.7% yoy, flat qoq), with approvals and disbursements falling 45% and 56% respectively. However, spreads were stable qoq at 2.5%, resulting in NII rising 22.4% yoy (2% qoq). In their results conference call, management maintained its loan growth guidance of 15-17% over FY13-14. We expect NII to grow 24.3% in FY13 and 25.2% in FY14, led by the strong loan pipeline and IDFC's ability to manage spreads efficiently.

Low fee & treasury income; productivity better. Non-interest income declined 22.5% yoy and 14.9% qoq on account of lower loan related fees (21.9% yoy, -11.4% qoq) and a sharp fall in treasury income (-92.3% yoy, -85.7% qoq). While asset management fees were strong (27.9% yoy, 26.1% qoq), investment banking (-50% yoy, -92% qoq) and institutional broking (-12% qoq) remained weak. However, IDFC has been able to keep operating costs in check, with cost-to-income falling 60bps yoy to 16%.

Stable asset quality, well-capitalized for growth. Asset quality is healthy, with gross NPA falling 5.1% qoq to Rs.1.4bn (0.26%) of loans. We expect IDFC's conservative underwriting standards and prudent provisioning policy to keep credit costs stable at ~40bps over FY13-15. With capital adequacy of 22.5% (tier-1: 20.2%), it is adequately capitalized for growth opportunities in infra finance.

Our take. With its strong domain expertise and unique position, we believe IDFC is poised to capitalize on opportunities in infra funding, and sustain RoA of 2.7% over FY14-15. Hence, we retain our Buy rating. Our sum-of-parts valuation gives us fair value of Rs.219; we value the lending business at Rs.188 a share (1.9x FY14e BV) and other businesses and investments at Rs.31. Risks. Substantial slowdown in infrastructure spending and inability to mobilise resources for the AMC business.

Source : Equity Bulls

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