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IDFC: Slow but steady - Views on News from Equitymaster
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IDFC: Slow but steady
Jan 30, 2009

Performance summary
  • Interest income grows 32% YoY in 9mFY09, on the back of 7% YoY growth in advances; disbursements drop by 34% YoY.
  • Disbursement to sanction ratio increase from 57% in 9mFY08 to 64% in 9mFY09.
  • Net interest margins remain stable at 2.9% in 9mFY09 despite higher costs.
  • Non-interest income grows by 140% in 9mFY09 due to growth in AMC related fees.
  • Bottomline grows by a tepid 5.4% YoY due to higher operating cost and tax incidence.


Consolidated numbers…
Rs (m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Interest income 7,634 8,620 12.9% 20,281 26,703 31.7%
Interest expended 3,921 5,306 35.3% 10,338 15,392 48.9%
Net Interest Income 3,713 3,314 -10.7% 9,943 11,311 13.8%
Net interest margin       2.9% 2.9%  
Other Income 33 33 0.0% 50 120 140.0%
Operating expense 682 662 -2.9% 1,678 2,361 40.7%
Provisions and contingencies 73 34 -53.4% 301 380 26.2%
Profit before tax 2,991 2,651 -11.4% 8,014 8,690 8.4%
Tax 774 810 4.7% 1,977 2,328 17.8%
Effective tax rate 25.9% 30.6%   24.7% 26.8%  
Profit after tax/ (loss) 2,217 1,841 -17.0% 6,037 6,362 5.4%
Net profit margin (%) 29.0% 21.4%   29.8% 23.8%  
No. of shares (m)       1,294 1,295  
Book value per share (Rs)*         48.2  
P/BV (x)         1.2  
* (Book value as on 31st December 2008)

What has driven performance in 3QFY09?
  • Although IDFC’s sanctions and disbursements have fallen significantly on a YoY basis, the institution has concluded the first nine months of the fiscal with a strong pipeline of Rs 30 bn of un-disbursed but sanctioned loans. The institution has clearly prioritised its goals into – liquidity, profitability and growth. This has resulted in the institution cutting back on its incremental disbursement despite sufficient capital adequacy (22.1% in 9mFY09). The loan growth of 7.4% YoY is marginally lower than our estimate of 9% for the full year FY09.

  • Ability to re-price the matured loan agreements aggressively due times of tight liquidity in the markets has helped IDFC maintain its NIMs at 2.9% (2.9% in 9mFY09). We have assumed the same to be at 2.8% for the full year.

    Going slow…
    (Rs m) 9mFY08 9mFY09 Change
    Sanctions 148,540 86,540 -41.7%
    Disbursements 84,140 55,180 -34.4%
    D/S ratio 56.6% 63.8%  
    Advances 198,360 213,040 7.4%

  • The share of non-interest income to IDFC’s total income remained stable at 40% despite lower treasury 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 tripled over the past 12 months and comprised 11% of IDFC’s total income in 9mFY09. The same has grown with incremental revenues from private equity and asset management business (IDFC AMC). Investment banking and broking income have fallen by 44% YoY.

  • The institution is currently adequately capitalised and needs to maintain minimum CAR of 15% as per the RBI norms. The operating costs for the institution have also increased by 41% YoY in 9mFY09 (cost to income ratio of 21.5%), with the additional employee intake. IDFC continued to maintain zero net NPA levels

What to expect?
At the current price of Rs 58, the stock is very attractively valued at 1.0 time our estimated FY11 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.

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