IDFC - Sturdy credit growth, better productivity, stable asset quality; Buy - Anand Rathi

Lending business moderates, spreads stable. IDFC's 4QFY13 loan growth was modest (15.7% yoy, 4.5 qoq), with approvals and disbursements falling 24% and 22% respectively. Exposure to the energy and transportation sectors slipped to 65.1% (66.1% in 4QFY12). Spreads were stable qoq at 2.5%, resulting in NII rising 9.9% yoy (-2% qoq). We expect NII to grow 22.1% in FY14 and 26% in FY15, led by the sturdy loan pipeline and IDFC's ability to manage spreads efficiently.

Strong fees and large Treasury income; productivity better. Non-interest income vaulted 178% yoy (106% qoq) on account of higher loan-related fees (65.5% yoy, 23.1% qoq) and a sharp rise in Treasury income (714% yoy, 90% qoq). Asset-management fees were sturdy (52.5% yoy, 3.4% qoq), with sharp growths in investment banking (26x qoq) and institutional broking (40% yoy, 100% qoq). IDFC has been able to keep operating costs in check, with cost-to-income falling 553bps yoy (55bps qoq) to 16%.

Stable asset quality, well-capitalized for growth. Asset quality is healthy, with gross NPA falling 40.3% qoq to Rs. 851m (0.15%) of loans. We expect IDFC's conservative underwriting standards and prudent provisioning policy to keep credit costs stable, at ~40bps over FY14-15. With capital adequacy of 22.1% (tier-1: 19.8%), it is adequately capitalized for growth opportunities in infrastructure 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 a 2.7% RoA over FY14-15. Hence, we retain our Buy. Our sum-of-parts valuation gives us a fair value of Rs. 198; we value the lending business at Rs. 173 a share (1.8x FY14e BV) and other businesses and investments at Rs. 25. Risks: Substantial slowdown in infrastructure spending and inability to mobilise resources for the AMC business.

Source : Equity Bulls

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