IDFC - Well placed to benefit from the infrastructure cycle - Antique

Although multiple obstacles have delayed the realization of the large opportunity in India's infrastructure space, the regulators and stakeholders have woken up to the pressing needs of this sector and started taking remedial measures, even though the paces of reforms have been rather slow. In this backdrop, IDFC being a diversified infrastructure play, offers the opportunity to benefit from any improvements in policy/regulation/execution on the one hand, and its selective lending approach and strong reserve creation offer cushion from asset quality deterioration. IDFC remains our preferred pick in the infrastructure financing space and remains a sound alternative to PSU banks.

Diversified lending book provides multiple opportunities

Unlike most banks' infrastructure portfolios, IDFC's book of Rs550bn is well diversified across the infrastructure spectrum that includes energy (41%), transportation (24%), telecom (23%) and re-newables. Ability to capture re-financing opportunities in FY13 aided in 16% YoY loan growth. IDFC continues to be well poised to capture any re-finance or capex opportunities that will arise in the infrastructure space. The management guides for loan book growth of 10-15% for FY14E.

Asset quality risks low, provision cover healthy

Coal or gas based private sector projects under-construction constitute only 2.5% of total exposure as of March 2013. On an overall basis, 80% of IDFC's loans are towards operational projects that have significantly lower risks. IDFC maintains a general provision of 1.7% of standard assets on its balance sheet (instead of the mandatory 25 bps of standard assets) which would cushion earnings in case of deterioration in asset quality.

Diversified liability mix to aid stable spreads, other income contribution could rise

IDFC has a well diversified liability profile constituting bank borrowings (17% of total), NCDs (71% of total) and forex loans (11% of total) which will ensure that IDFC benefits from a falling interest rate environment and aid stable spreads. The management guides for stable spreads over FY14. IDFC's noninterest income (ex-principal) has declined from 39% of total income in Q2FY11 to 15% in Q4FY12 and recovered to 27% in Q4FY13. We expect them to sustain at current levels with some modest increase in noninterest income due to higher contribution from the alternates business in FY14.

Source : Equity Bulls

Keywords