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IDFC: Strong pipeline of assets - Views on News from Equitymaster

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IDFC: Strong pipeline of assets
Jan 27, 2010

Performance summary
  • Consolidated income from operations grows 13% YoY in 9mFY10, on the back of 14% YoY growth in advances. Disbursements grow by 44% YoY, approvals by 91% YoY in the nine month period.
  • Asset management fees grow by 67% YoY, total asset under management (AUM) stands at Rs 359 bn at the end of December 2009.
  • Net interest margins (NIM) improve from 2.9% in 9mFY09 to 3.5% in 9mFY10 due to lower funding costs.
  • Non-interest income grows by 44% in 9mFY10 due to drop in income from treasury operations.
  • Bottomline grows by 31% YoY in 9mFY10 despite higher provisioning.

Rs (m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Income from operations 8,620 9,743 13.0% 26,703 30,096 12.7%
Interest expended 5,306 4,785 -9.8% 15,392 15,173 -1.4%
Net Interest Income 3,314 4,958 49.6% 11,311 14,923 31.9%
Net interest margin       2.9% 3.5%  
Other Income 33 5 -86.4% 120 173 44.2%
Operating expense 663 860 29.7% 2,361 3,215 36.2%
Provisions and contingencies 33 424 1184.8% 380 600 57.9%
Profit before tax 2,651 3,679 38.8% 8,690 11,281 29.8%
Tax 810 979 20.9% 2,328 2,928 25.8%
Effective tax rate 30.6% 26.6%   26.8% 26.0%  
Profit after tax/ (loss) 1,841 2,700 46.6% 6,362 8,353 31.3%
Net profit margin (%) 21.4% 27.7%   23.8% 27.8%  
No. of shares (m)       1,295 1,295  
Book value per share (Rs)*         54.1  
P/BV (x)         2.7  
* (Book value as on 31st December 2009)

What has driven performance in 9mFY10?
  • With a very encouraging pick-up in demand for funding for infrastructure investment activity in the past nine months, IDFC saw its sanctions grow by 91% YoY. This was accompanied by growth in disbursements and loan book at 44% and 14% YoY respectively. The institution had a historically low disbursement to sanction ratio of 48% in 9mFY10. However, IDFC expects the same to pick up in the next few quarters as the projects mature. While the loan growth is well within our estimates for FY10, IDFC will be targeting loan growth in the range of 15% to 20% in the medium term.

  • Ability to borrow at cheaper rates has helped IDFC improve its NIMs to 3.5% (2.9% in 9mFY09). We have estimated the same at 3.0% for the full year.
    Strong growth pipeline…
    (Rs m) 9mFY09 9mFY10 Change
    Sanctions 86,450 165,500 91.4%
    Disbursements 55,170 79,580 44.2%
    D/S ratio 63.8% 48.1%  
    Advances 210,270 239,140 13.7%

  • An interesting revelation by IDFC’s management was that with banks now having to spend more to penetrate into Tier III and IV cities, their systemic cost of funds and asset pricing is set to rise. Particularly so until the growth in advances pick up reasonably. This will ease the competitive pressure on IDFC’s asset book and also ease the pressure on its spreads. Also, the banks unlike IDFC are largely concentrating on short term working capital loans for infrastructure players.

  • The share of non-interest income to IDFC’s operating income increased from 39% in 9mFY09 to 45% in 9mFY10 due to higher fees and investment banking income. The institution also clarified that in case of loans disbursed against shares of companies, a loan to value ratio of 2 times is maintained. The volatility in share prices have therefore not impacted IDFC’s asset book.

  • Asset management fees grew 67% YoY over the past 12 months. The same has grown with incremental revenues from private equity and asset management business (IDFC AMC). Investment banking and broking income grew by 55% YoY, loan related fees grew by 18% YoY in 9mFY10.

    Funds under management at the end of 9mFY10
    Funds US$ m Rs m
    IDFC Private Equity 1,300 59,980
    Fund I 200 8,440
    Fund II 400 19,880
    Fund III 700 31,660
    IDFC Project Equity 870 38,370
    IDFC AMC 5,600 260,930
    Total 7,770 359,280

  • The institution is currently adequately capitalised with CAR of 24% in 9mFY10 and needs to maintain minimum CAR of 15% by March 2011 as per the RBI norms. The operating costs for the institution have also increased by 36% YoY (cost to income ratio of 21%) with the additional employee intake. IDFC had 0.2% net NPA levels at the end of 9mFY10.

What to expect?
At the current price of Rs 146, the stock is attractively valued at 2.3 times our estimated FY12 adjusted book value. 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. Given the improved asset growth and profitability prospects for the institution in the long term, we retain our positive view on the stock.

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