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IDFC: Economy takes toll on loan sanctions - Views on News from Equitymaster
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IDFC: Economy takes toll on loan sanctions
Jul 29, 2013

IDFC declared its results for the first quarter of the financial year 2013-14 (FY14). The institution grew its income from operations and profits by strong 25% and 47% YoY respectively. Here is our analysis of the results.

Performance summary
  • Consolidated income from operations grows 25% YoY in 1QFY14, While advances grew 13% YoY, the disbursements and approvals fell during 1QFY14. This was largely on account of slowdown in infrastructure activity and other macro turbulencs.
  • Total asset under management (AUM) stands at Rs 486 bn at the end of June 2013. While the mutual fund contributed to some of the growth, fees from the alternatives business did not show up an impressive performance.
  • Net interest margins (NIM) decrease marginally to 4.1% from 4.3% in 1QFY14.
  • Bottomline grows by 47% YoY in 1QFY14 mainly on the back of lower provisioning.
  • Capital adequacy ratio stands at a robust 23% at the end of 1QFY14 (Tier-1 ratio of 20.7%). Net NPAs come in at 0.2% at the end of June 2013.

Consolidated financial performance
Rs (m) 1QFY13 1QFY14 Change
Income from operations 18,344 22,944 25.1%
Interest expended 10,706 12,775 19.3%
Net Interest Income  7,638 10,169 33.1%
Net interest margin 4.3% 4.1%  
Other Income 77 42 -46.0%
Operating expense 1,160 1,384 19.4%
Provisions and contingencies 1,026 592 -42.3%
Profit before tax 5,530 8,234 48.9%
Tax 1,713 2,627 53.3%
Effective tax rate 31.0% 31.9%  
Minority int/assoc (16) (37)  
Profit after tax/ (loss) 3,798 5,573 46.7%
Net profit margin (%) 20.7% 24.3%  
No. of shares (m)   1,515  
Book value per share (Rs)*   94.1  
P/BV (x)    1.0  
* (Book value as on 30th June 2013)

What has driven performance in 1QFY14?
  • Sturdy top-line growth and lower provisions led IDFC to report robust 46.7% YoY growth in profitability for the first quarter of the current fiscal.

  • Given the weak macros, infrastructure activity continues to remain sluggish in the first quarter of FY14. This was reflected in the company's poor loan offtake performance. The sanctions for the quarter declined significantly by 78% YoY and the disbursements fell by 28% YoY. The company's disbursements comprised of exposure to sectors such as energy (40% of total), followed by transportation (25%) and telecom (22%). Further, the company has been particularly cautious in terms of corporate lending with no major uptick in corporate loan disbursements on sequential basis during the quarter. Furthermore, the pipeline for infrastructure loans stands weak for the company.
    Significant slowdown in fresh sanctions
    (Rs m) 1QFY13 1QFY14 Change
    Sanctions 128,090 28,330 -77.9%
    Disbursements  44,870 32,110 -28.4%
    D/S ratio 35.0% 113.3%  
    Advances 508,920 576,000 13.2%

  • IDFC reported healthy 33.3% YoY growth in AUMs during 1QFY14 backed by sturdy growth in AMC business. While the private equity business suffered owing to tough market conditions reporting mere 2.8% Yoy growth, the AMC business recorded whopping 42.5% YoY growth during 1QFY14.

    Funds under management
    Funds (Rs m) 1QFY13 1QFY14 Change
    IDFC Private Equity 43,350 44,570 2.8%
    Fund I 2,040 750  
    Fund II 12,280 14,780  
    Fund III 29,030 29,030  
    IDFC Project Equity 38,370 38,370 0.0%
    IDFC AMC 283,000 403,270 42.5%
    Total 364,720 486,210 33.3%

  • The margins for the quarter dropped to 4.1% from 4.3% same quarter a year ago. Subdued loan growth and squeezed spreads have impacted the margins for the company.

  • The operating costs for the quarter have gone up by 19.4% YoY on account of higher non-HR expenses incurred during the quarter.

  • Asset quality for IDFC has not been much of a worry. The Gross NPAs for the quarter were reported at 0.32% and net NPAs at 0.2% and stand out best in the industry. The loan-loss provision ratio also stands at satisfactory levels at 1.9%. However, the power sector is under pressure on both the generation side, (due to lack of coal and gas availability) and the distribution side (due to the sorry financial state of various state electricity boards). Hence, the asset quality continues to be under watch.

  • The company stands adequately capitalized with total capital adequacy ratio at 23% for the quarter ended June 2013. The Tier I stands at healthy 20.7%.

What to expect?

At the current price of Rs 104, the stock is valued at 1.0 times our estimated FY15 adjusted book value. IDFC is one of the best poised institutions in the financial sector to weather sectoral headwinds. It has the highest capital adequacy ratio and high operating efficiency. We have factored in muted growth in loan book and risks to margins and asset quality in our assumptions. Moreover, the first quarter of this fiscal also witnessed weak sanctions and poor loan growth on account of sluggish infrastructure activity. While negative sentiments towards the infrastructure sector may prevail in the near to medium term, investors should reap the benefit of steady long term players like IDFC. The capital strength and fairly decent return ratios coupled with lower valuations reinforces our positive stance on IDFC. We thus reiterate our BUY view on the stock with a long-term perspective.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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