IDFC - Easing credit growth, but stable spreads and asset quality; Buy - Anand Rathi

Lending business eases, spreads stable. IDFC's 2QFY14 loan growth was modest (3.4% yoy, -2.9% qoq), with disbursements falling 59% yoy. However, approvals spiked over 600% yoy, led by short-term corporate loans to the telecoms sector. Exposure to the energy and transportation sectors slipped to 58.7% (63.3% in 2QFY13). Spreads fell 10bps yoy to 2.5%, resulting in NII rising 6.7% yoy (flat qoq). Management maintains its focus on asset quality, and expects FY14 loan growth to be modest, driven primarily by re-financing.

Weak fees and Treasury income; productivity declines. Non-interest income fell 1% yoy (down 39.6% qoq) on account of modest Treasury income (14.7% yoy, -61.4% qoq). Asset-management fees were sturdy (50.7% yoy, 11.8% qoq), with weak traction in investment banking (-85% yoy) and institutional broking (-25% yoy). While IDFC has been able to keep operating costs in check (10.7% yoy), slower non-interest income growth led to cost-to-income rising 84bps yoy (190bps qoq) to 15.5%.

Asset quality stable, well-capitalized. Gross NPA fell 0.6% qoq to Rs. 1,805m (0.32% of loans). Hence, loan provisions declined 22.2% yoy. We expect IDFC's conservative underwriting standards and prudent provisioning policy to keep credit costs stable over FY14-15, at ~50bps. With capital adequacy of 23.9% (tier-1: 21.6%), the NBFC is adequately capitalized for growth.

Our take. With its strong domain expertise, we believe IDFC is poised to capitalize on long-term opportunities in infrastructure funding, and sustain a 2.8% RoA over FY14-15. Hence, we retain our Buy rating. Our sum-of-parts valuation gives us a fair value of Rs. 148. We astimate the lending business at Rs. 121 (1.2x FY14e BV) and the other businesses and investments at Rs. 27. Risks: Substantial slowdown in infrastructure spending and inability to mobilise resources for the AMC business.

Source : Equity Bulls

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