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IDFC: Striking a balance - Views on News from Equitymaster
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IDFC: Striking a balance
Apr 28, 2008

Performance summary
  • Interest income grows 68% YoY in FY08, on the back of 47% YoY growth in advances and 63% YoY growth in disbursements.

  • Disbursement to sanction ratio improves from 56% to 59% during the year.

  • Net interest margins remain stable at 2.9% in FY08 (2.8% in FY07).

  • Non-interest income grows by a whopping 125% YoY, aided by assets management fees.

  • Bottomline grows by 45% YoY despite higher taxes and provisioning.

Standalone numbers…
Rs (m) 4QFY07 4QFY08 Change FY07 FY08 Change
Interest income 4,058 6,753 66.4% 15,005 25,236 68.2%
Interest expended 2,660 4,446 67.1% 8,554 14,802 73.0%
Net Interest Income 1,398 2,307 65.0% 6,451 10,434 61.7%
Net interest margin       2.8% 4.6%  
Other Income 45 70 55.6% 52 117 125.0%
Operating expense 194 387 99.5% 613 1,134 85.0%
Provisions and contingencies 158 398 151.9% 174 688 295.4%
Profit before tax 1,091 1,592 45.9% 5,716 8,729 52.7%
Tax 241 360 49.6% 1,087 2,039 87.6%
Effective tax rate 22.1% 22.6%   19.0% 23.4%  
Profit after tax/ (loss) 850 1,232 44.9% 4,629 6,690 44.5%
Net profit margin (%) 21.0% 18.2%   30.9% 26.5%  
No. of shares (m)       1,125 1,294  
Book value per share (Rs)*         43.2  
P/BV (x)         3.9  
* (Book value as on 31st March 2008)

What has driven performance in FY08?
  • Loan book steady and stable: Outperforming our estimates in terms of advance growth and net interest margins, IDFC has concluded the fiscal on a robust note with a pipeline of Rs 83 bn of un-disbursed but sanctioned loans. While IDFC has continued to re-shuffle its loan portfolio in tune with the changing dynamics of the economy, its spreads have increased due to better pricing power and enhanced product mix.

    The institution clocked 47% YoY growth in advances on the back of a buoyant 53% YoY growth in disbursements. Further, the disbursement to sanction ratio improved from 55.7% in FY07 to 59.1% in FY08. Despite the firmness in interest rates, the demand for infrastructure loans remained strong. The institution reduced its exposure to energy and telecom sectors. The same was routed to industrial and commercial infrastructure and tourism sectors.

    Going steady…
    (Rs m) FY07 FY08 Change
    Sanctions 132,030 203,090 53.8%
    Disbursements 73,570 120,060 63.2%
    D/S ratio 55.7% 59.1%  
    Advances 139,430 204,940 47.0%

  • Fees – Well diversified stream: The share of non-interest income to IDFC’s operating income increased from 26% in FY07 to 50% in FY08. Fee income trebled and the share of fees in non-interest income was 75% in FY08. Nearly half of the fee income was derived from investment banking, due to the spurt of offshore and domestic inorganic growth initiatives by Indian corporates. Asset management fees comprised 10% of the total fee income generating returns of 2.1% on the total invested corpus of US$ 665 m. The same is set to increase with the acquisition of Stanchart’s asset management business. IDFC also believes that, while this leg of the business, like the other segments, will be less capital intensive and high ROE (return on equity) generating, it will also bring in some stability of revenues as against the others that have some lumpiness in revenues.

    Non interest income
      FY07 FY08  
      Rs m % of total Rs m % of total Change
    Treasury 370 21.6% 1,290 24.3% 248.6%
    Asset Management 540   560 10.5% 3.7%
    IDFC - SSKI (Inv.Banking)     1,870 35.2%  
    Corporate advisory 800   1,590 29.9% 98.8%
    Total fees 1,340 78.4% 4,020 75.7% 200.0%
    Total non-interest income 1,710   5,310   210.5%

  • Costs rear their head: As seen in the past few quarters, the changing income mix (more contribution from other income) and the removal of benefits under section 10 (23 G), has increased the effective tax rate for IDFC (from 19.0% in FY07 to 23.4% in FY08). IDFC sees this trend continuing, in line with the growth in its fee income (expected effective tax rate to stabilise at 23% in FY09). The operating costs for the institution have also increased by 85% YoY in FY08 (cost to income ratio of 10.7%), with the additional employee intake (cost of 200 employees of SSKI consolidated in IDFC’s book).

What to expect?
At the current price of Rs 172, the stock is valued at 3.0 times our estimated FY10 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. Even if the share of IDFC in the total private sector infrastructure funding pie is to come down to 20% (from 25% currently), we see the institution’s balance sheet size tripling in the next 4 years, if the most conservative growth estimates of the economy are to fructify.

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