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IDFC: Our revised view - Views on News from Equitymaster
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IDFC: Our revised view
Jul 2, 2007

IDFC operates as a professionally managed infrastructure financing entity whose focus areas are energy, telecom, transportation and industrial and commercial projects. IDFC finances 25% of the total infrastructure outlay in the country. We had recommended a HOLD on the stock in March 2007 with a March 2009 target price of Rs 110. Given the recent developments with regard to the government’s infrastructure outlay in the eleventh 5-year plan and the institution’s capital raising plans through qualified institutional placement, we have reviewed our numbers based on the following premises. Leading the PPP bandwagon…
Recognising the fact that infrastructure development will have to play in helping sustain the economic growth - at an annual 8% plus momentum achieved during the last few years, the Committee on Infrastructure, Government of India, has budgeted US$ 320 bn for investment in infrastructure during the Eleventh Plan period (2007-2012). Public investment, given governmental priorities to rein in the fiscal deficit and increase spending in the social sector, has to necessarily be supplemented by public-private partnerships (PPPs) and in many cases exclusive investment by the private sector.

As per IDFC’s estimations, the non-government expenditure (by way of PPP) would comprise 73% of the total infrastructure spending by FY12E. Of this, the institution expects that foreign capital by way of FDI and long-term debt to the tune of US$ 5 bn per annum would be required to fund the infrastructure outlay. As per our estimations, even if 50% of the target is achieved and IDFC retains its 25% share in the PPP market, its advances should grow at a CAGR of 65% over the next 3 years. We have, however, adopted a conservative stance given the firmness in interest rates, policy issues and capital constraints. Our advance growth estimates for the company stand at a compounded annual rate of 27% during the period FY07 to FY10E.

% of GDP (at 2005 - 06 prices) FY07 FY12E
Infrastructure spending 5.0 7.5
     
Government 1.7 2.0
% of total 34.0% 26.7%
Non government 3.3 5.5
% of total 66.0% 73.3%
     
Financing    
Domestic savings 4.7 6.5
Foreign investment 0.3 1.0
Source: IDFC

Capital adequacy…
IDFC’s CAR (capital adequacy ratio) declined to 20.3% in FY07 from 25.6% at the end of March 2006. The institution has decided to raise capital to the tune of US$ 500 m (Rs 21 bn, assumed at a rate of Rs 42 per US dollar) through a qualified institutional placement (QIP). Assuming that the institution raises the fresh capital at 5 times its FY07 adjusted book value, its book value would also rise sharply to Rs 43 per share in FY08 from Rs 26 in FY07. We expect that post capital raising (14% equity dilution), IDFC’s 'return on equity' (17.8% in FY07) would be temporarily depressed in FY08E and FY09E but will rebound to near the same level by FY10. The enhanced book value will poise IDFC attractively against its peers in terms of forward valuations. The Board of IDFC has also approved increase in FII shareholding limit from 49% to 74%.

AUM benefits yet to filter in…
The institution is targeting its AUM (assets under management) to go up from US$ 700 m currently to US$ 2 bn by the end of FY08 and US$ 3 bn to 4 bn by FY10. The asset management fees on these funds (at 1.5% to 2% of the corpus) are expected to significantly propel the growth in fee income base. Revenues from the infrastructure fund in collaboration with Citigroup and Blackstone are also expected to filter in from 4QFY08 onwards.

Other potential upsides…
In order to de-risk its revenue stream from the project financing business and provide a fillip to fee income, the institution had undertaken several initiatives that include partnership with Feedback Ventures, a 33% stake in SSKI for an exposure in equity market linked product offerings in FY07. The SSKI stake contributed Rs 110 m (2%) to the institution’s bottomline in FY07. IDFC recently increased its stake in SSKI to 66% and this is expected to aid its fee income growth going forward. Also, at the end of FY07, IDFC held 8.2% stake in NSE and going by the valuation of the latter at US$ 2.3 bn (as per the recent deals), the gains per share of IDFC for the stake held in NSE comes to Rs 5 per share (not factored into its book value).

Revised outlook
Based on the above analysis and factoring in the upsides that are to accrue to IDFC with the QIP, we have revised our FY09E target price to Rs 156, from the earlier estimates of Rs 110.

Read our research report on IDFC for a detailed view on the company.

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