IDFC: Loan growth, margins get liquidity boost - Views on News from Equitymaster

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IDFC: Loan growth, margins get liquidity boost

Feb 13, 2012

IDFC declared its results for the third quarter of the financial year 2011-12 (3QFY12). The institution grew its income from operations and profits by 26% and 19% YoY respectively. Here is our analysis of the results.

Performance summary
  • Consolidated income from operations grows 26% YoY in 3QFY12 and by 30% YoY in 9mFY12, on the back of 25% YoY growth in advances. Disbursements fall by 45% YoY, approvals by 41% YoY in 1HFY12 on account of a slowdown in infrastructure activity.
  • Overall asset management revenues increased by 13% YoY in 9mFY12, total asset under management (AUM) stands at Rs 372 bn at the end of December 2011. While the public markets contributed to the growth, fees from the alternatives business faltered.
  • Net interest margins (NIM) increases marginally to around 4.3%.
  • Other income see an almost 82% fall YoY in 3QFY12 and a 30% fall YoY in 9mFY12.
  • Bottomline grows by 19% YoY in 3QFY12 and by 23% in YoY 9mFY12 on the back of higher net interest income and a control in operating expenses.
  • Capital adequacy ratio stands at a robust 21.9% at the end of 9mFY12 (Tier-1 ratio of 19.6%).

Consolidated numbers...
Rs (m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Income from operations 13,063 16,392 25.5% 36,144 47,054 30.2%
Interest expended 6,500 8,802 35.4% 17,040 24,601 44.4%
Net Interest Income 6,562 7,590 15.7% 19,104 22,453 17.5%
Net interest margin       4.2% 4.3%  
Other Income 38 7 -81.6% 120 84 -29.5%
Operating expense 1,641 1,266 -22.8% 4,130 3,711 -10.1%
Provisions and contingencies 480 978 103.8% 1,422 2,008 41.2%
Profit before tax 4,479 5,353 19.5% 13,672 16,818 23.0%
Tax 1,272 1,537 20.8% 3,745 4,629 23.6%
Effective tax rate 28.4% 28.7%   27.4% 27.5%  
Minority int/assoc 8 (4)   23 2  
Profit after tax/ (loss) 3,215 3,812 18.6% 9,950 12,192 22.5%
Net profit margin (%) 24.6% 23.3%   27.5% 25.9%  
No. of shares (m)         1,464  
Book value per share (Rs)*         84.9  
P/BV (x)         1.6  
* (Book value as on 31st December 2011)

What has driven performance in 9QFY12?
  • IDFC saw its disbursements and approvals fall by 41% and 45% YoY respectively in 9mFY12. The current economic environment as well as a slowdown in infrastructure activity, especially in the power sector contributed to this decline. The company has been seeing some uptick on the road projects and telecom front, however there is not much traction on the power sector side. The institution was able to improve its NIMs to around 4.3% from 4.2% on higher yields. The company increased borrowings by 19% YoY in 9mFY12 mainly through the long term funding route and through overseas borrowings at favorable rates.

  • The RBI's 13 interest rate hikes over the past year and a half has led to a substantial slowdown in economic activity. Slower GDP growth in the country and inaction on the infrastructure front are expected to lead to muted loan growth for the company in FY12 versus the 50% growth in advances seen in FY11. The management reiterates its assumption of a 15-20% loan growth. In fact, since the company was able to clock in a 25% growth rate in 9mFY12, we may have to revise our relatively muted loan growth estimates. Policy issues, environmental clearance delays, and coal linkage unavailability has impacted the performance of the power sector. However these issues are expected to be ironed out as some discoms have raised tariffs and Coal India has committed to supply at least 70-80% of its target. IDFC's exposure to the power sector loans was around 42% at the end of 9mFY12, followed by transport at 25%, and telecom at 22%. As regards to its power exposure, IDFC has significant exposure to renewable energy projects and captive power projects. Approximately half of its exposure is into operational assets. Thus mainly the assets for projects still under construction are at risk.

  • As regards IDFC's telecom exposure in context of the Supreme Court's cancellation of 122 telecom licenses, the company has been very careful in general on credit risk taken. Its exposure (over 90%) is mainly to large, cash rich telecom operators. It doesn't have any direct exposure to the companies which were issued new telecom licenses in 2008. IDFC was able to see increased allocation to this sector on account of its advantage of lower cost of funds compared to bank base rates. Thus companies in the telecom space opted for various refinancing options and short term loans from the asset financier.

    Significant slow down in fresh leading
    (Rs m) 9mFY11 9mFY12 Change
    Sanctions 365,030 216,660 -40.6%
    Disbursements 224,950 124,290 -44.7%
    D/S ratio 61.6% 57.4%  
    Advances 350,210 438,970 25.3%

  • Overall asset management revenues saw a 13% increased YoY in 9mFY12, on account of a fall in income from the alternative investments desk, however fees from its mutual fund business performed well, growing by 23%. This was on account of focused selling initiatives as well as the improved rate environment. Investment banking and institutional broking income decreased by 63% YoY in 9mFY12. This was more in line with the general sentiment in the capital markets. The company is planning to monetize some capital gains from its investments in FY12, in order to improve profitability in light of a balance sheet slowdown. Income from principal investments saw a 90% YoY increase in 9mFY12. Loan related fees however saw a 47% decrease in 1HFY12 on account of a slowdown in fresh lending this year. The company is looking at raising some funds for its alternative portfolio as well as looking at raising a real estate fund over the next 1-2 quarters.
    Funds under management in 9m FY12
    Funds US$ m Rs m
    IDFC Private Equity 1,000 43,920
    Fund I 100 2,600
    Fund II 300 12,280
    Fund III 600 29,040
    IDFC Project Equity 900 38,370
    IDFC AMC 5,400 289,990
    Total 7,300 372,280

  • The institution is currently adequately capitalised with CAR (capital adequacy) of 21.9% in 9mFY12 versus a regulatory requirement of 15% CAR of as per its status as an Infrastructure Financing Company (IFC). Its core Tier-1 capital ratio stands at 19.6%. The operating costs for the institution have decreased to 16.5% YoY, versus a cost to income ratio of 21.5% in 9mFY11. It has concentrated on improving its efficiency in operations, and this helped contribute to a healthy growth in net profits. Income from Operations for 3QFY12 and 9mFY12 was higher on account of profit on sale of 25% equity shares in IDFC Asset Management Company and IDFC AMC Trustee to French major Natixis Global Asset Management for Rs 837.8 m.

  • IDFC maintained its strong asset quality with 0.2% net NPA levels at the end of 9mFY12. However, the power sector is under serious pressure on both the generation side, (due to lack of coal availability) and the distribution side (due to the sorry financial state of various state electricity boards. But while there is still some uncertainty on the generation side, higher tariffs would help reduce the cash losses of state electricity boards. In 9mFY12, it did not see any of its accounts restructured. However it saw one account in the tourism space turn non- performing. Most of its provisions this quarter were on account of its mark to market losses in equity portfolio, which should be reversed when markets improve.

What to expect?
At the current price of Rs 133.7, the stock is valued at 1.5 times our estimated FY14 adjusted book value. The company is expected to witness a slowdown in balance sheet growth in FY12, compared to the previous year on account of lower credit offtake in the infra space. We have been very conservative with our estimates. However in light of the better than expected performance in 9mFY12 we may have to revise our estimates upwards. The company was able to see increased traction on account of RBI's indication of monetary policy easing. Plus the company is able to offer cheaper funds versus bank base rates on account of its borrowings from the overseas markets and tax free bonds.

Approvals and disbursements have taken a hit in 9mFY12. These were well anticipated given the policy inaction, environmental clearances and coal linkage issues that continue to dog the power sector. However, the company is going to try and focus on growth in the renewable energy space, and in road projects in order to fund its balance sheet growth. The institution has also been able to maintain its asset quality, and is not expected to see significant pressure on the same going forward as its loan book is of a very good quality. IDFC has not seen any proposals for restructuring so far this year. Also, it has one of the highest capital adequacy ratios and high operating efficiency. We thus reiterate our positive view on IDFC with a long-term perspective. While negative sentiments towards the infrastructure sector may prevail in the near to medium term, investors should reap the benefit of margin of safety in valuations of steady long term players like IDFC.

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