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IDFC: De-clogging bottlenecks - Views on News from Equitymaster

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IDFC: De-clogging bottlenecks

Jul 20, 2009

Performance summary
  • Standalone and consolidated income from operations grow by 8% YoY and 14% YoY respectively in 1QFY10.
  • Consolidated non-interest income grows 21% YoY in 1QFY10 after lower investment banking and loan related fees in FY09.
  • Cost to income ratio increases from 20% in 1QFY09 to 22% in 1QFY10.
  • Asset management fees increase 4 times while AUM grows 93% YoY until 1QFY10
  • Net interest margins (NIM) improve from 2.9% in 1QFY09 to 3.2% in 1QFY10
  • Standalone bottomline grows by 19% YoY while consolidated bottomline grows by 26% YoY in 1QFY10 due to improved other income and lower provisioning.

Consolidated numbers
Rs (m) 1QFY09 1QFY10 Change
Income from operations 8,686 9,923 14.2%
Interest Expense 4,867 5,267 8.2%
Net Interest Income 3,819 4,656 21.9%
Net interest margin (%) 2.9% 3.1%  
Other Income 19 23 21.1%
Other Expense 769 1,026 33.4%
Provisions and contingencies 199 (66) -133.2%
Profit before tax 2,870 3,719 29.6%
Tax 684 973 42.3%
Profit after tax/ (loss) 2,186 2,746 25.6%
Minority interest 19 22  
Net profit 2,167 2,724  
Net profit margin (%) 24.9% 27.5%  
No. of shares (m)   1,295.2  
Book value per share (Rs)*   49.8  
P/BV (x)   2.9  
* Book value as on 31st March 2009

What has driven performance in 1QFY10?
  • While prima facie IDFC’s 1QFY10 loan growth numbers reflect a significant slowdown in the private sector participation in infrastructure investment activity, a deeper analysis shows that the institution has been able to de-clog some bottlenecks and lend more towards project equity. What IDFC has in fact cut down are corporate loans (due to lower demand for the same) and loan against shares. Although IDFC’s sanctions fell by merely 3% YoY suggesting improved demand for project loans, the disbursements have fallen by 44% YoY in 1QFY10 due to the institution’s selective funding based on loan pricing. As mentioned earlier, IDFC has clearly prioritised its goals into – liquidity, profitability and growth. This has resulted in the institution cutting back on its incremental disbursement despite sufficient capital adequacy (24% in FY09).

    Selective funding…
    (Rs m) 1QFY09 1QFY10 Change
    Sanction 44,770 43,610 -2.6%
    Disbursements 27,350 15,420 -43.6%
    D/S ratio 61.1% 35.4%  
    Advances 214,920 211,140 -1.8%

  • Ability to re-price the matured loan agreements aggressively during times of tight liquidity in the markets has helped IDFC improve its NIMs to 3.2% (2.9% in 1QFY09).

  • The share of non-interest income to IDFC’s total income increased from 43% in 1QFY09 to 46% in 1QFY10 due to higher loan related fees and stable investment banking and broking income. The institution hiked its stake in IDFC-SSKI to 100% this quarter. IDFC also clarified that in case of loans disbursed against shares of companies, a loan to value ratio of 2 times is maintained. The volatility in share prices have therefore not impacted IDFC’s asset book.

  • As IDFC’s assets under management have nearly doubled in the past twelve months to US$ 6.6 bn, the fees from the same have grown four times to Rs 720 m in the same period (0.3% of average AUM).

    Assets under management
    Fund 1QFY09 1QFY10 Change
      Rs m  
    IDFC Private Equity 27,090 59,920 121.2%
    Fund I 8,170 8,440 3.3%
    Fund II 18,920 19,880 5.1%
    Fund III - 31,600  
    IDFC Project Equity 22,470 38,370 70.8%
    IDFC Investment Advisors 1,430 2,970 107.7%
    IDFC Mutual Fund 114,000 216,890 90.3%
    Total 164,990 318,150 92.8%
    Source: IDFC presentation

  • The institution is currently adequately capitalised and needs to maintain minimum CAR of 15% as per the RBI norms. The operating costs for the institution have also increased by 33% YoY in 1QFY10 (cost to income ratio of 22%). However, the same was particularly due to the inclusion of a one time fee payment for the project equity business. IDFC had 0.2% net NPA levels at the end of 1QFY10.

What to expect?
At the current price of Rs 140, the stock is attractively valued at 2.5 times our estimated FY11 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. Having said that, if the asset growth continues to remain at lower levels (as compared to our estimates) we may have to revise our estimates downwards for the year going forward.

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