IDFC - Fundamental Call - Consortium

IDFC provides end to end infrastructure financing and project implementation services. RBI's aggressive stance to tame inflation at cost of industrial growth did hurt the capex cycle, adversely affecting companies like IDFC.

Budget Expectation: Some clarity over the problems of infrastructure spending such as power, environment, mining, coal issues would revive infra cycle. Also, wide expectation of increase in tax free bond limits for individuals would ease cost of capital for the company. Hence this budget presents opportunity for companies like on both demand front (increase in infra spending) and easing cost.

Q3 Results

Sharp drop in disbursements: IDFC reported net profit of Rs 4.6 bn, up 19.4% YoY, below estimates, mainly due to sharply lower disbursements at Rs 25.8 bn, down 56.6% YoY resulting in lower then estimated NII at Rs 6.6 bn, up 22.4% YoY (infra NII at Rs 6.1bn, up 29.2% YoY; treasury NII at Rs 450 mn, down 28.6% YoY). Lower non-interest income at Rs 1.7 bn, down 23% YoY also affected profit growth. Infra loan book up 21.5% YoY at Rs 533.2 bn (flattish QoQ); loan book growth mainly driven by refinancing and corporate loans.

Stable spreads and NIMs: Spreads (on 12 months rolling basis) continues to remain stable at 2.5%; while NIMs have reported a marginal dip to 4.2% (4.3% at 2QFY13).

Sharp fall in non-interest income: Steep decline in income from principal gains (Rs 70 mn, down 92.3% YoY and 85.7% QoQ) and lower income from investment banking and broking (Rs 80 mn, down 11.1% YoY and 70.4% QoQ) resulted in lower non-interest income. Income from asset management is at Rs 870 mn, up 27.9% YoY (led by fees and alternatives), while income from fixed income operations (fees and trading gains) is at Rs 300 mn, up 36.4% YoY. Loan related fees are at Rs 390 mn, up 21.9% YoY (down 11.4% QoQ due to lower disbursements).

Stable asset quality: GNPA at 0.26% (0.28% at 2QFY13); on absolute basis, GNPAs are down 5.1% QoQ at Rs 1.4 bn. Provisions at Rs 520 mn, down 46.9% YoY (Rs 34 mn on loans and Rs 18 mn on investments); lower provision on loans due to lower risk weights on refinance assets.

Outlook and Valuation

We expect IDFC to deliver 15-18% CAGR in infra-loan book over FY12-15E; energy, transportation and telecom (mainly refinancing of operational assets) are likely to be the key growth drivers. We expect stable spreads of 230-250 bps and NIMs of 400 bps+ over FY12-15E supported by easing cost of funds and efficient liability management; benign competition should ensure stable yields. Non-interest income is likely to remain subdued given the weakness and volatility in capital markets; exit in principal investment book and private equity book should lend support. We expect earnings CAGR of 18-20% over FY12-15E; RoE improving to 16% levels on the back of steady profit growth and increase in leverage to 5.5x+ levels. We have tweaked our EPS estimates for FY13E (Rs 11.7, earlier Rs 12.3) and for FY14E (Rs 13.9, earlier Rs 14.9) as we build in lower disbursements and noninterest income. Currently, IDFC is trading at 11.4x FY14E PER and 1.6x FY14E P/ABV; maintain Outperformer with SOTP based target price of Rs 180.

Source : Equity Bulls

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