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IDFC: Sale of mutual fund biz buoys profits - Views on News from Equitymaster
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IDFC: Sale of mutual fund biz buoys profits
May 9, 2012

IDFC declared its FY12 (financial year 2012) results. The institution grew its income from operations and profits by 29% and 21% YoY respectively. Here is our analysis of the results.

Performance Summary
  • Consolidated income from operations grows 29% YoY in FY12, on the back of a similar 28% YoY growth in advances. Disbursements fell by 31% YoY, approvals by 25% YoY in FY12 on the back of a weak macro environment.
  • Net interest margins (NIM) improve marginally to 4.3% in FY12 compared to 4.2% previously.
  • Asset management fees see a decline of 4% YoY, and its income from principal investments see an increase of 83% YoY in FY12.
  • Bottomline grows by 21% YoY in FY12 and 17% in 4QFY12. Higher other income and lower operating expenses helped buoy profits.
  • Capital adequacy ratio stands at 20.8% at the end of FY12, compared to 24.5% at the end FY11.
  • The board recommends a dividend of Rs 2.3 per share, working out to a yield of 2%.

Consolidated numbers...
Rs (m) 4QFY11 4QFY12 Change FY11 FY12 Change
Income from operations 13,016 17,148 31.7% 49,160 63,365 28.9%
Interest expended 6,835 9,960 45.7% 23,875 34,562 44.8%
Net Interest Income 6,181 7,187 16.3% 25,285 28,803 13.9%
Net interest margin       4.2% 4.3%  
Other Income 51 63 24.9% 171 986 478.0%
Operating expense 1,191 1,505 26.4% 5,321 5,216 -2.0%
Provisions and contingencies 924 838 -9.4% 2,346 2,846 21.3%
Profit before tax 4,116 4,908 19.2% 17,788 21,727 22.1%
Tax 1,252 1,590 26.9% 4,998 6,219 24.4%
Effective tax rate 30.4% 32.4%   28.1% 28.6%  
Minority and assoc. interest 3 30   26 32  
Profit after tax/ (loss) 2,867 3,348 16.8% 12,817 15,540 21.3%
Net profit margin (%) 22.0% 19.5%   26.1% 24.5%  
No. of shares (m)         1,512  
Book value per share (Rs)*         81.2  
P/BV (x)         1.4  
* (Book value as on 31st March 2012)

What has driven performance in FY12?
  • IDFC saw its disbursements and approvals fall by 31% and 25% YoY respectively in FY12. 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. This is in line with the company's efforts to reduce exposure to the power sector. The institution was able to improve its NIMs to around 4.3% from 4.2% on higher yields.

  • The company expects a 20% growth in the balance sheet over the next few years. However any fresh sanctions that the company commissions over the next 12-18 months needs to have a greater project visibility from a 3 year basis. Else, IDFC may not be willing to allocate its balance sheet to such assets. In FY12, the company saw significant demand from refinancing, largely from operating assets in the road and renewable space. It also saw some refinancing demand from top flight players in the telecom space. IDFC's exposure to the power sector loans was around 41% at the end of FY12 (46% in FY11), followed by transport at 28%, and telecom at 21%. The financier is succeeding in reducing exposure to the power sector in light of various structural problems such as coal availability, environmental clearance delays, policy issues etc. It especially wants to reduce exposure to thermal power generation projects.

    Macro woes put a dampner on new lending
    (Rs m) FY11 FY12 Change
    Sanctions 427,160 318,680 -25.4%
    Disbursements 267,020 184,040 -31.1%
    D/S ratio 62.5% 57.8%  
    Advances 376,520 481,840 28.0%

  • Despite an increase in cost of funds, the company was able to manage its borrowings costs with the help of overseas borrowings. This helped IDFC improve its NIMs to 4.3% in FY12 from 4.2% earlier. The management expects NIMs to be in excess of 4% going forward and spreads to either be stable or increasing. Spreads (difference between the borrowing and lending rate) however came in higher at 2.4% in FY12, versus 2.2% in FY11. The company increased borrowings by 28% YoY in FY12 through the long term bonds and through overseas borrowings at favorable rates. The company also saw a jump in short term borrowings over the past year.

  • Overall asset management revenues saw a 4% decrease YoY in FY12, on account of a fall in income from the alternative investments desk, however fees from its mutual fund business performed well, growing by 11%. It was a tough year for the mutual funds business; however IDFC was one of the few players who actually managed to increase its market share to 3.8%. It is currently one of the top ten funds in the country. Investment banking and institutional broking income decreased by 62% YoY in FY12. This was more in line with the general sentiment in the capital markets. Other Income for the year ended March 31, 2012 includes profit on sale of 25% stake in IDFC Asset Management Company Limited and IDFC AMC Trustee Company Ltd to French major Natixis Global Asset Management amounting to Rs 837.8 m.

    Funds under management FY12
    Funds US$ bn Rs bn
    IDFC Private Equity 1.0 43.4
    Fund I 0.0 2.1
    Fund II 0.3 12.3
    Fund III 0.6 29.0
    IDFC Project Equity 0.9 38.4
    IDFC AMC 6 280.4
    Total 7.4 362.1

  • The institution is currently adequately capitalised with CAR (capital adequacy) of 20.8% in FY12 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 18.5%. The operating costs for the institution have decreased to 17.5% YoY, versus a cost to income ratio of 20.9% in FY11. It has concentrated on improving its efficiency in operations, and this helped contribute to a healthy growth in net profits. The institution believes that its costs will remain within a similar range going forward as well.

  • IDFC maintained its strong asset quality with 0.15% net NPA levels at the end of FY12. 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. IDFC's loan loss reserve of 1.5% of its closing loan book gives it a cushion against asset quality concerns. It intends to maintain superior asset quality going forward as well. IDFC's underwriting standards and processes have a lot to do with it maintaining superior asset quality. A significant factor is also specific project as well as promoter selection, which IDFC is very conservative on. Specialised players have a strong knowledge of the industry and are thus better able to judge cash flow characteristics, execution challenges, and various other factors that determine repayment ability.

What to expect?
At the current price of Rs 115, the stock is valued at 1.3 times our estimated FY14 adjusted book value. Despite a tough macro environment, the company was still able to post a 28% growth in advances, which came ahead of our conservative estimates. The company was able to see increased traction on account of RBI's monetary policy easing and strong demand for refinancing which is expected to continue over the next few quarters. 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. Most banks have reached the sectoral caps and borrower limits for infra financing. Plus banks have become relatively risk averse, thus when the sector bounces back, IDFC should be able to benefit from the incremental demand. The company is confident of growing its balance sheet at 20%+ levels over the next few years, without sacrificing margins.

Approvals and disbursements have taken a hit in FY12. 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. It plans to reduce exposure to the power sector on a long term basis. 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. 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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