IDFC - Operating profit in line; growth slows down - Ambit

Results summary: IDFC's 3QFY13 core operating profit (adjusted for gains on sale of investments) at Rs6.4 increased 44% YoY and decreased 1% QoQ, 3% below our estimates. Reported net profit at Rs4.55bn was up 19% YoY but down 4% QoQ (7% below our estimates), because profit on sale of investments was only at Rs70mn during the quarter vs Rs910mn in 3QFY12 and Rs490mn in 2QFY13.

Loan book remained flat QoQ and hence YoY loan growth declined to 22% vs 36% YoY growth at 1HFY13. However, all operating metrics were robust as: (i) net interest margins remained stable at ~4.25%; (ii) the company maintained strong asset quality in both absolute and %age terms despite a tough macro environment, with gross NPAs of only 0.3% and no incremental slippages during the quarter; (iii) operational efficiency improved further with a 12bps decline in opex/average asset ratio and 240bps decline in the cost-to-income ratio on a YoY basis, because operating expenses increased by only 7% YoY; and (iv) non-interest income was up 28% YoY (8% QoQ) primarily driven by robust profitability from the asset management business.

Where do we go from here? Despite its loan book being entirely exposed to the infrastructure and power sectors and weak profitability in capital market businesses, the company has been able to maintain healthy profitability over the past one year. IDFC has able to expand its loan book through the refinancing route and increasing share of non-project loans. IDFC has maintained steady NIMs of 4.3-4.4%, maintained healthy asset quality (barring odd misses like Deccan Chronicle), and improved operational efficiency significantly. Declining wholesale interest rates, improved outlook for the asset management and investment banking business and the company's continuous improvement in operational efficiency are positive catalysts for earnings growth and hence the stock price. However, at 1.7x FY14 P/ABV and 12.9x FY14 P/E, the valuations are more than reflecting these positives, given that (i) RoEs would remain at 14-16% over the next two years even if we expect no asset quality deterioration for the company going forward and; (ii) some asset quality stress for the company going forward cannot be ruled out, because ~40% exposed to the power sector, where issues related to fuel supply and SEB fiscal health, is far from being resolved. IDFC remains our preferred stock pick in the infrastructure financing segment (vs PFC and REC); however, on absolute basis, the risk-reward is not favourable at current valuations. We maintain our fair value of the stock at Rs145/share; however, in line with the change in target price methodology for our coverage universe on one-year forward basis, we change our target price to Rs165/share and maintain our SELL stance.

Source : Equity Bulls

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