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IDFC: Displaying its core strengths - Views on News from Equitymaster
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IDFC: Displaying its core strengths
Apr 27, 2010

IDFC declared its FY10 results. The institution grew its interest income and profits at 11% and 40% YoY respectively.

Performance summary
  • Consolidated income from operations grows 11% YoY in FY10, on the back of 22% YoY growth in advances. Disbursements grow by 60% YoY, approvals by 195% YoY in FY10.
  • Asset management fees increase 42% YoY, total asset under management (AUM) stands at Rs 364 bn at the end of March 2010.
  • Net interest margins (NIM) improve by 0.5% due to lower funding costs.
  • Non-interest income grows by 60% YoY due to higher investment banking and loan related fees.
  • Bottomline grows by 40% YoY and 87% YoY in FY10 and 4QFY10 respectively.
  • Declared dividend of Rs 1.5 per share (dividend yield 0.9%).

Consolidated numbers...
Rs (m) 4QFY09 4QFY10 Change FY09 FY10 Change
Income from operations 9,561 10,238 7.1% 36,264 40,334 11.2%
Interest expended 5,420 4,362 -19.5% 20,812 19,535 -6.1%
Net Interest Income   4,141 5,876 41.9% 15,452 20,799 34.6%
Net interest margin       3.1% 3.6%  
Other Income            (16)             95 -693.8%            104            268 157.7%
Operating expense 1,305 2,268 73.8%         3,665         5,483 49.6%
Provisions and contingencies 1,151          697 -39.4%         1,531         1,297 -15.3%
Profit before tax 1,669 3,006 80.1% 10,360 14,287 37.9%
Tax           454          738 62.6%         2,782         3,665 31.7%
Effective tax rate 27.2% 24.6%   26.9% 25.7%  
Profit after tax/ (loss) 1,215 2,268 86.7%         7,578 10,622 40.2%
Net profit margin (%) 12.7% 22.2%   20.9% 26.3%  
No. of shares (m)               1,295         1,300  
Book value per share (Rs)*         53.9  
P/BV (x)                      2.9  
* (Book value as on 31st March 2010)

What has driven performance in FY10?
  • Thanks to a reasonable pick-up in demand for funding for infrastructure investment and banks’ reluctance to fund long term assets with their short term liabilities, IDFC saw its sanctions grow by 195% YoY. The growth in disbursements and loan book was at 60% and 22% YoY respectively. The institution had earlier prioritised its goals into - liquidity, profitability and growth. This has resulted in the institution growing its asset book as well as margins without sacrificing asset quality.

  • Ability to borrow at cheaper rates has helped IDFC improve its NIMs to 3.6% (3.1% in FY09). We had estimated the same at 3.0% for the full year.

    Cautious growth...
    (Rs m) FY09 FY10 Change
    Sanctions 103,170 304,420 195.1%
    Disbursements 80,850 129,620 60.3%
    D/S ratio 78.4% 42.6%  
    Advances 205,960 250,310 21.5%

  • An interesting revelation by IDFC’s management in the conference call 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.

  • The share of non-interest income to IDFC’s total income increased from 16% in FY09 to 27% in FY10 due to higher 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 grew by 42% over the past 12 months and comprised 27% of IDFC’s total income in FY10 (18% in FY09). The same has grown with incremental revenues from private equity and asset management business (IDFC AMC). Investment banking and broking income grew by 50% YoY, loan related fees grew by 30% YoY in FY10.

    Funds under management FY10
    Funds US$ m Rs m
    IDFC Private Equity 1,300 59,920
    Fund I 180 8,440
    Fund II 420 19,880
    Fund III 700 31,600
    IDFC Project Equity 870 38,370
    IDFC AMC 5,895 265,270
    Total 8,065 363,560

  • The institution is currently adequately capitalised with CAR of 24% in FY10 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 50% YoY (cost to income ratio of 26%) with the additional employee intake. IDFC had 0.2% net NPA levels at the end of FY10.

What to expect?
At the current price of Rs 165, the stock is valued at 2.6 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. Having said that, we see lower asset growth restricting the balance sheet growth for the institution in the medium term.

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