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IDFC: Non fund dampener - Views on News from Equitymaster

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IDFC: Non fund dampener

Jul 18, 2008

Performance summary
  • Interest income grows 45% YoY in 1QFY09, on the back of 42% YoY growth in advances and 12% YoY growth in disbursements.

  • Disbursement to sanction ratio improves from 56% in 1QFY08 to 60% in 1QFY09 as incremental sanctions grow by a marginal 5% YoY.

  • Net interest margins improve to 2.9% in 1QFY09 due to higher yields.

  • Non-interest income drops by 2% YoY due to lower investment banking fees, although loan related fees double.

  • Bottomline grows by 21.9% YoY despite higher provisioning.

Standalone numbers…
Rs (m) 1QFY08 1QFY09 Change
Operating income 5,568 8,097 45.4%
Interest expended 3,106 4,863 56.6%
Net Interest Income 2,462 3,234 31.4%
Net interest margin 2.7% 2.9%  
Other Income - 18  
Operating expense 235 401 71.0%
Provisions and contingencies 63 198 213.5%
Profit before tax 2,164 2,653 22.6%
Tax 486 607 24.8%
Effective tax rate 22.5% 22.9%  
Profit after tax/ (loss) 1,678 2,047 21.9%
Net profit margin (%) 30.1% 25.3%  
No. of shares (m)   1,295  
Book value per share (Rs)*   43.7  
P/BV (x)   2.4  
* (Book value as on 30th June 2008)

What has driven performance in 1QFY09?
  • Cautious stance: Confirming to our broad estimates for FY09 in terms of incremental advance growth and net interest margins, IDFC has concluded the first quarter of the fiscal on a robust note with a pipeline of Rs 45 bn of un-disbursed but sanctioned loans. The institution has, however, reduced its exposure to the cement and steel sectors while holding on to its exposure to energy and transportation sectors. This is in a bid to re-shuffle its loan portfolio in tune with the changing dynamics of the economy, and have exposure in areas where the projects have sustainable ROAs (return on assets), so that IDFC’s spreads remain undiluted.

    The institution clocked 42% YoY growth in advances on the back of a slower 12% YoY growth in disbursements. Further, the disbursement to sanction ratio improved from 57% in 1QFY08 to 61% in 1QFY09. Nevertheless, due to the firmness in interest rates, the demand for infrastructure loans remained showed some signs of slowdown and the institution although confident of long-term prospects, is currently adopting a cautious stance.

    Going slow…
    (Rs m) 1QFY08 1QFY09 Change
    Sanctions 42,860 44,860 4.7%
    Disbursements 24,440 27,350 11.9%
    D/S ratio 57.0% 61.0%  
    Advances 151,080 214,890 42.2%

  • Non-fund income – I-Banking hit: The share of non-interest income to IDFC’s operating income reduced from 29.4% in 1QFY08 to 20.7% in 1QFY09 primarily due to lower treasury and investment banking income. Although the loan related and corporate advisory fees doubled, IDFC non fund income almost remained flat due to a 29% drop in investment banking (SSKI) income. It may be noted that 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.

    Non interest income
    1QFY08 1QFY09
    Rs m % of total Rs m % of total Change
    Treasury 780 47.6% 640 38.1% -17.9%
    Asset Management 130   220 13.1% 69.2%
    IDFC - SSKI (Inv.Banking) 500   360 21.4% -28.0%
    Corporate advisory 230   460 27.4% 100.0%
    Total fees 860 52.4% 1,040 61.9% 20.9%
    Total non-interest income 1,640   1,680   2.4%

  • Asset management fees comprised 13% of the total fee income generating returns of 0.5% on the total invested corpus of US$ 3.6 bn. The same is set to increase with incremental revenues from Stanchart’s asset management business (IDFC AMC). 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

    Funds under management
    Funds US$ m Rs m
    IDFC Private Equity 630 27,090
    Fund I 190 8,170
    Fund II 440 18,920
    IDFC Project Equity 523 22,470
    IDFC AMC 2,451 114,000
    Debt 1,614 78,000
    Equity 837 36,000
    IDFC Investment Advisory 33 1,430
    Total 3,637 164,990

  • Capital conservation mode: IDFC will need to raise additional capital in FY09 and the management clarified that the same may be through a combination of debt and equity. The institution is currently adequately capitalised and needs to maintain minimum CAR of 15% as per RBI norms. The operating costs for the institution have also increased by 71% YoY in FY08 (cost to income ratio of 12.3%), 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 110, the stock is valued at 2.1 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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Mar 22, 2019 12:09 PM