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IDFC: Staff costs temper profit growth - Views on News from Equitymaster
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IDFC: Staff costs temper profit growth
Feb 2, 2011

IDFC declared its 3QFY11 results. The institution grew its income from operations and profits by 31% and 19% YoY respectively. Here is our analysis of the results.

Performance summary
  • Consolidated income from operations grows 20% YoY in 9mFY11, on the back of 51% YoY growth in advances. Disbursements grow by 183% YoY, approvals by 121% YoY in 9mFY11.
  • Net interest margins (NIM) improve marginally to 3.8% in 9mFY11 (rolling 12 month average) on lower cost of funds.
  • Other income sees a fall of around 30% YoY in 9mFY11. But the same saw a big leap in 3QFY11 (albeit on a lower base).
  • Bottomline grows by 19% YoY in 9mFY11 and 3QFY11. This came in lower than the 28% growth in net interest income (9mFY11) due to higher provisioning (on higher gross disbursements) and increase in other expenses.
  • Capital adequacy ratio stands at 24.9% at the end of 9mFY11, compared to 22.6% at the end of the previous quarter last year.


Consolidated numbers...
Rs (m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Income from operations 9,974 13,063 31.0% 30,096 36,144 20.1%
Interest expended 4,785 6,500 35.9% 15,173 17,040 12.3%
Net Interest Income 5,190 6,562 26.5% 14,923 19,104 28.0%
Net interest margin       3.5% 3.8%  
Other Income 2 38 2082.3% 170 120 -29.6%
Operating expense 1,091 1,634 49.7% 3,214 4,104 27.7%
Provisions and contingencies 421 487 15.5% 598 1,447 142.1%
Profit before tax 3,679 4,479 21.8% 11,281 13,672 21.2%
Tax 979 1,272 30.0% 2,928 3,745 27.9%
Effective tax rate 26.6% 28.4%   26.0% 27.4%  
Profit after tax/ (loss) 2,700 3,207 18.8% 8,353 9,927 18.8%
Net profit margin (%) 27.1% 24.6%   27.8% 27.5%  
No. of shares (m)       1,297 1,461  
Book value per share (Rs)*         78.0  
P/BV (x)         1.8  
* (Book value as on 31st December 2010)

What has driven performance in 9mFY11?
  • Due to a robust pick-up in demand for funding for infrastructure development and banks' reluctance to fund long term assets with their short term liabilities, IDFC saw its sanctions grow by 121% YoY. The growth in disbursements and loan book was a robust 183% and 51% YoY respectively. The growth in loans came in much higher than our estimates.

  • Moderate growth in interest expense due to lower cost of funds helped IDFC improve its NIMs to 3.8%. We expect NIMs to sustain in the 3-4% levels over the next 3 years. It has also maintained its spreads at 2.4%. The company increased borrowings by 51% YoY in 9mFY11 mainly through the long term funding route. Borrowings through bonds/debentures saw an increase in weightage from 56% previously to 63% currently. The company is also in process of issuing its 2nd tranche of tax-free infra bonds. Since it is currently tax-savings season, these bonds should be able to garner a better response.

    Dynamic growth...
    (Rs m) 9mFY10 9mFY11 Change
    Sanctions 165,500 365,030 120.6%
    Disbursements 79,620 224,950 182.5%
    D/S ratio 48.1% 61.6%  
    Advances 231,900 350,210 51.0%

  • Investment banking and broking saw a 22% increase, along with general buoyancy in the capital markets. Fee income (on loans and others) increased by 93%. Treasury income also saw a boost with a 46% growth. However growth in asset management fees was flat and income from principal investments saw an over 30% decline. The company was able to realize a much better performance on its balance sheet (lending) related business than its other functions.

    Funds under management 9mFY11
    Funds US$ m Rs m
    IDFC Private Equity 1,000 44,870
    Fund I 200 3,350
    Fund II 300 12,690
    Fund III 600 28,840
    IDFC Project Equity 900 38,370
    IDFC AMC 4,400 180,840
    Total 6,000 264,080

  • The institution is currently more than adequately capitalised with CAR (capital adequacy ratio) of around 25% in 9mFY11. It needs to maintain minimum CAR of only 15% by March 2011 as per the RBI norms, as well as its new IFC status. The strong capital base will help keep a good capital buffer for further balance sheet growth.

  • The operating costs for the institution have also increased by 28% YoY in 9mFY11.This huge jump was on the back of a 30% increase in staff costs due to provisioning for variable compensation (bonuses) for its employees. The same was under provisioned in 3QFY10. IDFC was able to see greater visibility in 9 month period for its business growth, hence the bonus provisioning was done in this quarter. Its cost to income ratio however remained constant at 21.3%, the institution further expects to improve operational efficiency. IDFC maintained strong asset quality with 0.1% net NPA levels at the end of 9mFY11, maintaining its conservative stance.

What to expect?
At the current price of Rs 141.1, the stock is valued at an attractive level of 1.5 times our estimated FY13 adjusted book value. With one of the highest capital adequacy ratios, high operating efficiency and one of the best return ratios and asset quality. We thus reiterate our positive view on IDFC with a long-term perspective. (Research Pro subscribers can view our latest update on the company here.) The company was able to better our loan growth estimates. It sticks to its stance of tripling its balance sheet over the next 2-3 years. It witnessed a stellar 51% growth in its loan book in 9mFY11. Subsequent growth may not come at such an accelerated pace. Inflation, tight liquidity and rising interest rates are some concerns. However, the company is confident of meeting its long term targets. It has also maintained credit quality, despite rising rates and has as usual shown conservativeness in lending and in gauging promoter/sponsor creditworthiness.

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