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IDFC: Fees show the way - Views on News from Equitymaster
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IDFC: Fees show the way
Jan 15, 2008

Performance summary
  • Operating income grows 78% YoY in 3QFY08, on the back of 43% YoY growth in advances and 53% YoY growth in incremental disbursements.
  • Disbursement to sanction ratio slows down from 60% to 57% during the nine-month period.

  • Net interest margins remain stable at 3% in 3QFY08.

  • Non-interest income grows by a whopping 134% YoY.

  • Bottomline grows by 73% YoY and 45% YoY during 3QFY08 and 9mFY08 respectively despite higher taxes and provisioning.

Standalone numbers…
Rs (m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Operating income 3,862 6,888 78.4% 10,947 18,483 68.8%
Interest expended 2,290 3,952 72.6% 5,894 10,356 75.7%
Net Interest Income 1,572 2,936 86.8% 5,053 8,127 60.8%
Net interest margin 2.8% 3.0%
Other Income - 31 7 48 633.8%
Operating expense 148 271 83.1% 419 747 78.3%
Provisions and contingencies 43 63 46.5% 16 289 1706.3%
Profit before tax 1,381 2,633 90.7% 4,625 7,139 54.4%
Tax 229 646 181.8% 846 1,680 98.5%
Effective tax rate 16.6% 24.5% 18.3% 23.5%
Profit after tax/ (loss) 1,152 1,987 72.5% 3,778 5,459 44.5%
Net profit margin (%) 29.8% 28.8% 34.5% 29.5%
No. of shares (m) 1,125 1,294 1,125 1,294
Book value per share (Rs)* 42.6
P/BV (x) 5.4
* (Book value as on 31st December 2007)

What has driven performance in 3QFY08?
  • Loan book steady and stable: While IDFC has continued to re-shuffle its loan portfolio in tune with the changing dynamics of the economy, its yields and costs have almost remained stable. Despite the firmness in interest rates, the demand for infrastructure loans remained strong. The institution reduced its exposure to energy and telecom sectors. The same was routed to industrial and commercial infrastructure and tourism sectors. IDFC reported 43% YoY growth in advances in 9mFY08 on the back of a buoyant 53% YoY growth in disbursements. The disbursement to sanction ratio has, however, declined to 56.6% in 9mFY08 as against 59.5% in the corresponding period of FY07.

    Going steady…

    (Rs m) 9mFY07 9mFY08 Change
    Sanctions 92,550 148,530 60.5%
    Disbursements 55,050 84,010 52.6%
    D/S ratio 59.5% 56.6%
    Advances 134,830 192,420 42.7%

  • Fees – Well diversified stream: The share of non-interest income to IDFC’s operating income has increased from 19% in 9mFY07 to 26% in 9mFY08. Fee income increased by 2.5 times and the share of fees in non-interest income increased from 38% in 9mFY07 to 59%. Nearly half of the fee income was derived from investment banking, thanks to the spurt of offshore and domestic inorganic growth initiatives by Indian corporates. Asset management fees comprised 14% of the total fee income generating returns of 5.8% on the total invested corpus of Rs 680 m.

    Non interest income
    9mFY07 9mFY08
    Rs m % of total Rs m % of total Change
    Treasury 1280 61.5% 2,000 41.1% 56.3%
    Asset Management 400 8.2%
    IDFC - SSKI (Inv.Banking) 1,240 25.5%
    Corporate advisory 1,230 25.3%
    Total fees 800 38.5% 2,870 58.9% 258.8%
    Total non-interest income 2,080 4,870 134.1%

    IDFC is targeting its assets under management (AUM) to go up from US$ 680 m currently to US$ 2 bn by the end of 1QFY09 and US$ 3 bn to 4 bn by FY10. The asset management fees on these funds (at 1.5% to 2% of the corpus) are expected to significantly propel the growth in fee income base. Revenues from the infrastructure fund in collaboration with Citigroup and Blackstone are also expected to filter in 4QFY08 onwards.

  • Costs rear their head: As seen in the past few quarters, the changing income mix (more contribution from other income) and the removal of benefits under section 10 (23 G), has increased the effective tax rate for IDFC (from 18.3% in 9mFY07 to 23.5% in 9mFY08). IDFC sees this trend continuing, in line with growth in its fee income (expected effective tax rate to stabilise at 22% in FY08). The operating costs for the institution have also increased by 83% YoY in 3QFY08 and 78% YoY in 9mFY08, with the additional employee intake (cost of 200 employees of SSKI consolidated in IDFC’s book).

What to expect?
At the current price of Rs 229, the stock is fairly valued at 4.1 times our estimated FY10 adjusted book value (after factoring in the equity dilution). At the end of FY07, IDFC held 8.2% stake in NSE and going by the valuation of the latter at US$ 2.3 bn (as per the recent deals), the gains per share of IDFC for the stake held in NSE comes to Rs 5 per share (not factored into its book value). The institution’s investment book stood at Rs 9.4 bn (net of project finance investment) having grown at 85%YoY. Further, IDFC acquired additional 13.8% stake in SSKI in 3QFY08 bringing its stake in the latter to 79.8%. With one of the highest capital adequacy ratios, highest operating efficiency and one of the best return ratios, we reiterate our positive view on the company with a long-term perspective. However, given the valuations, fresh investments at the current levels are unwarranted.

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Feb 22, 2018 (Close)


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