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IDFC: Sharp fall in other income - Views on News from Equitymaster
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IDFC: Sharp fall in other income
May 2, 2011

IDFC declared its FY11 (financial year 2011) results. The institution grew its income from operations and profits by 22% and 21% YoY respectively. Here is our analysis of the results.

Performance summary
  • Consolidated income from operations grows 22% YoY in FY11, on the back of 50% YoY growth in advances. Disbursements grow by 106% YoY, approvals by 40% YoY in FY11.
  • Net interest margins (NIM) improve marginally to 3.8% in FY11 compared to 3.6% previously.
  • Asset management fees see a decline of 20%, and its income from principal investments see a decline of 27%.
  • Bottomline grows by 21% YoY in FY11 and 26% in 4QFY11. Higher tax outlays, increased provisioning and lower other income hurt profits.
  • Capital adequacy ratio stands at 24.5% at the end of FY11, compared to 20.4% at the end FY10.
  • The board recommends a dividend of Rs 2 per share, working out to a yield of 2%.

Consolidated numbers...
Rs (m) 4QFY10 4QFY11 Change FY10 FY11 Change
Income from operations 10,235 13,023 27.2% 40,330 49,167 21.9%
Interest expended 4,362 6,835 56.7% 19,535 23,875 22.2%
Net Interest Income  5,873 6,188 5.4% 20,796 25,292 21.6%
Net interest margin       3.6% 3.8%  
Other Income 126   43 -65.8%  296  163 -45.0%
Operating expense 2,294 1,170 -49.0% 5,511 5,321 -3.4%
Provisions and contingencies 702  945 34.6% 1,298 2,346 80.8%
Profit before tax 3,003 4,116 37.1% 14,284 17,788 24.5%
Tax 738 1,252 69.7% 3,666 4,998 36.3%
Effective tax rate 24.6% 30.4%   25.7% 28.1%  
Minority and assoc. interest  16 3   5 26  
Profit after tax/ (loss) 2,281 2,867 25.7% 10,623 12,817 20.6%
Net profit margin (%) 22.3% 22.0%   26.3% 26.1%  
No. of shares (m)         1,461  
Book value per share (Rs)*         77.0  
P/BV (x)         1.7  
* (Book value as on 31st March 2011)

What has driven performance in FY11?
  • 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 40% YoY in FY11. The growth in disbursements and loan book was a robust 106% and 50% YoY respectively. The growth in the loan book came in significantly higher than our estimates. Its sanctions however slowed down over the past 3 months. It was clocking an over 100% growth in sanctions in the 9 months ended December, 2010. Thus, there are signs that we will not be seeing the same level of growth going forward.

  • According to the management, this slowdown in disbursement growth was also as a result of a change in the business mix. Project loans take a lot longer to disburse, since it is linked with the actual progress of construction of the project. IDFC’s exposure to project loans increased from 55% in FY10 to 62% in FY11.

  • 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. Spreads (difference between the borrowing and lending rate) however came in a lower at 2.2% in FY11, versus 2.7% in FY10. The company increased borrowings by 37% YoY in FY11 mainly through the long term funding route. Borrowings through bonds/debentures saw an increase in overall weightage from 60% previously to 67% currently.

  • The company issued its three tranches of tax-free infra bonds to retail investors during the year. Overall it managed to raise Rs 14 bn against a target of Rs 34 bn for the year. However, since it was a new product in the market, response was lukewarm. With the tax benefits continuing next year as well, the company expects better retail participation going forward.

    On a high...
    (Rs m) FY10 FY11 Change
    Sanctions 304,420 427,160 40.3%
    Disbursements 129,620 267,020 106.0%
    D/S ratio 42.6% 62.5%  
    Advances 250,310 375,520 50.0%

  • Investment banking and broking saw a 9% increase, with volatile capital markets. Fee income (on loans and others) increased by 35%. Treasury income also saw a boost with a 50% growth YoY. However asset management fees decreased by 20% and income from principal investments saw a 27% 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 FY11
    Funds US$ m Rs m
    IDFC Private Equity 1,000 44,570
    Fund I 100 2,850
    Fund II 300 12,690
    Fund III 600 29,030
    IDFC Project Equity 900 38,370
    IDFC AMC 5,500 243,080
    Total 7,400 326,020

  • The institution is currently more than adequately capitalised with CAR (capital adequacy ratio) of around 25% in FY11. It needed 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.

  • IDFC's cost to income ratio however declined constant to 21% in FY11, against 26% previously. The institution has focused on improving operational efficiency over the past year. IDFC maintained strong asset quality with 0.1% net NPA levels at the end of FY11, maintaining its conservative stance.

What to expect?
At the current price of Rs 133, the stock is valued at a level of 1.5 times our estimated FY13 adjusted book value. (Research Pro subscribers can view our latest update on the company here.) IDFC continues to have one of the highest capital adequacy ratios, high operating efficiency and one of the best return ratios and asset quality in the business. The company was able to better our loan growth estimates by a fair margin, and also outperformed in terms of profits.

Subsequent growth may not come at such an accelerated pace as was seen in FY11. Inflation, liquidity concerns and rising interest rates are some concerns. A key challenge is also the exposure to the power sector, which amounted to 46% of the in FY11, compared to 38% in FY10. Two major risks that the sector is facing are the poor financial health of state electricity boards, whose cash losses as a percentage of total revenues have been increasing. Severe shortages of coal and gas are also a cause of concern. This supply shortage was also on account of the increased capacity addition which has been taking place in the 11th 5-year plan. Once suppliers build up their supply, in light of the increased demand, the situation should normalise. This is especially since the target for the power sector in the 12th plan (starting 2012) is even more ambitious.

IDFC lends only to projects which have a strong promoter profile, and supports projects which have access to a captive power source. The company has maintained its credit quality, and despite rising rates and has as usual shown conservativeness in lending and in gauging promoter/sponsor creditworthiness. We shall be reviewing our estimates based on the higher than expected loan growth in FY11, and the subsequent moderation in growth due to the high base effect.

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