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IDFC: Short term challenges prevail

Apr 28, 2014 | Updated on Oct 30, 2019

IDFC declared its results for the fourth quarter (4QFY14) and the financial year 2013-14. The institution reported a decline in its income from operations and profits by 0.6% and 50.9% YoY respectively. Here is our analysis of the results.

Performance summary
  • Consolidated income from operations declines 0.6% YoY in 4QFY14 but grows by 7.8% YoY in FY14, on the back of 5.7% YoY growth in advances. Disbursements fell by 7.9% YoY, while sanctions dropped by 1.1% YoY in FY14 on account of a persistent slowdown in infrastructure activity.
  • Overall asset management revenues increased in FY14, total asset under management (AUM) stands at Rs 541.6 bn at the end of March 2014. While the mutual fund contributed to some of the growth, fees from the alternatives business also supported other income growth.
  • Net interest margins (NIM) decrease marginally to 4.0% from 4.1% in FY13.
  • Other income sees a whopping 83% YoY increase to Rs 180 mn during FY14 primarily on the back of higher income from asset management and income from principal gains.
  • Bottomline declines by 50.9% YoY in 4QFY14 and by 1.8% in YoY FY14 on account of weak income growth and higher provisioning.
  • Capital adequacy ratio stands at a robust 22.3% at the end of FY14 (Tier-1 ratio of 20.1%). Net NPAs come in at 0.4% at the end of March 2014.
  • The entity fetched a banking license from the RBI in 4QFY14.
  • The board has proposed a dividend of Rs 2.6 per share for FY14, dividend yield 2.3%.

Consolidated financial performance
Rs (m) 4QFY13 4QFY14 Change FY13 FY14 Change
Income from operations 22,175 22,049 -0.6% 81,386 87,720 7.8%
Interest expended 12,043 12,493 3.7% 46,758 50,552 8.1%
Net Interest Income 10,132 9,556 -5.7% 34,628 37,168 7.3%
Net interest margin       4.1% 4.0%  
Other Income 9 146 1525.6% 98 180 82.6%
Operating expense 1,559 1,364 -12.5% 5,294 5,438 2.7%
Provisions and contingencies 1,647 4,825 192.9% 3,496 6,283 79.7%
Profit before tax 6,934 3,513 -49.3% 25,936 25,627 -1.2%
Tax 1,646 848 -48.5% 7,511 7,385 -1.7%
Effective tax rate 23.7% 24.1%   29.0% 28.8%  
Share of profit from associates 7 6   19 20  
Minority interest 38 92   81 235  
Profit after tax/ (loss) 5,257 2,579 -50.9% 18,362 18,027 -1.8%
Net profit margin (%) 23.7% 11.7%   22.6% 20.6%  
No. of shares (m)         1,516  
Book value per share (Rs)*         99.2  
P/BV (x)         1.1  
* (Book value as on 31st March 2014)

What has driven performance in FY14?
  • Challenges pertaining to lending to infrastructure sector continue to haunt IDFC. Moreover, election outcome and the policy measures thereafter will largely decide the future of the infrastructure lender. In addition, setting up a bank will mean pressure on capital and margins for the company. The exact nature of these challenges will be known over a period of time..

  • The assets under management for IDFC grew at a robust pace reporting 39% YoY growth during FY14. The total asset under management (AUM) stands at Rs 541.6 bn at the end of March 2014. While the mutual fund contributed to some of the growth, fees from the alternatives business supported other income growth.

    Funds under management
    Funds (Rs m) FY13 FY14 Change
    IDFC Private Equity 42,040 38,660 -8.0%
    Fund I 1,600 -  
    Fund II 11,410 14,210  
    Fund III 29,030 24,450  
    IDFC Project Equity 38,370 83,630 118.0%
    IDFC AMC 309,280 416,360 34.6%
    IDFC Real Estate Yield Fund - 2,930  
    Total 389,690 541,580 39.0%

  • IDFC's loan book performance clearly reflects the subdued infrastructure activity. While the sanctions pipeline has contracted by 1.1% YoY during FY14, the disbursements have declined by 7.9% YoY. Overall, the loan book reported 5.7% YoY growth during FY14. Due to the slowdown in infrastructure sector, the company aims to change the loan mix and re-evaluate risk-adjusted returns. Moreover, setting up a bank in the near future would also imply pressures on the capital and return ratios of the company. Since it will be at least 2 to 3 years before the banking businesses is put into place we have not factored in any estimates for the same in our projections yet.

    Significant slowdown in disbursements
    (Rs m) FY13 FY14 Change
    Sanctions 259,760 256,830 -1.1%
    Disbursements 176,950 162,960 -7.9%
    D/S ratio 68.1% 63.5%  
    Advances 565,950 598,290 5.7%

  • Moderation in loan growth impacted the interest income for the fourth quarter of FY14. For full year, the interest income grew by mere 7.3% YoY. Consequently the spreads for IDFC have contracted to 2.3% in FY14, down from 2.5% a year ago. The margins for FY14 stood at 4.0% as compared to 4.1% in FY13.

  • The non-interest income for FY14 has grown exponentially reporting 82.6% YoY growth. Backed by principal gains and fees from asset management, the other income growth remained robust even during the fourth quarter of FY14. Treasury income and loan related fees took a toll during the quarter.

  • Poor infrastructure activity, weak capex cycle and policy logjam have taken a toll on the infrastructure activity and subsequently dented the financial performance of IDFC too. Asset quality pressures continue to haunt the infrastructure sector. And therefore, on prudential grounds, the company has been proactively providing higher than the regulatory norm to avoid any major shortcomings in the future. However, higher NPLs and higher credit costs have dented the profitability of the company. While the gross NPAs have gone up to 0.6% in FY14 from 0.2% in FY13, the net NPAs too have spiked up to 0.4% as against 0.1% a year ago. The loan loss reserves have moved up to 2.4% of the gross loan book in FY14 as compared to 1.8% in FY13.

  • IDFC was amongst the two entities to fetch a banking license from the RBI in 4QFY14. The strategic shift from a non-banking finance unit to a bank set-up will unlock value only few years down the line. Hence, we have not factored in any estimates on this front at this juncture and await further clarity from the management. Nonetheless, the management has charted out roadmap to undertake banking business activity particularly in the next 18 months.

    Going by the regulatory norm, the company aims to curb its foreign shareholding and bring it down to below 50% levels. Therefore, to begin IDFC plans to launch preferential share issue for its domestic investors.

    Secondly, the company will take up the creation of a non-operative finance holding company (NOFHC) as directed by the RBI. The NOFHC will house the bank and the existing subsidiaries.

    All the assets that form part of the IDFC balance sheet will be transferred to the bank's balance sheet. And eventually, IDFC would stand as a parent company. While the banking entity would be listed since day one, there will be two listed entities; viz, IDFC the parent and its subsidiary the bank.

What to expect?
At the current price of Rs 114, the stock is valued at 1.0 times our estimated FY16 adjusted book value. IDFC is one of the best poised institutions in the financial sector to weather sectoral headwinds. It has the highest capital adequacy ratio and high operating efficiency. IDFC's net profit in FY14 has come in at 87.5% of our estimates mainly due to higher loan loss provisions. We have factored in muted growth in loan book and risks to margins and asset quality in our assumptions. We thus reiterate our BUY view on the stock 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 steady long term players like IDFC.

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Jun 11, 2021 (Close)