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IDFC: In transition phase - Views on News from Equitymaster
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IDFC: In transition phase
Jul 31, 2014

IDFC declared its results for the first quarter (1QFY15) of the financial year 2014-15. The institution reported a decline in its income from operations and profits by 7.6% and 13.6% YoY respectively. Here is our analysis of the results.

Performance summary
  • Consolidated income from operations declines 7.6% YoY in 1QFY15 on account of 7.0% YoY decrease in advances. Disbursements fell by 23.0% YoY, while sanctions dropped by 68.0% YoY in 1QFY15 as IDFC decided to slowdown and consolidate its loan book.
  • Overall asset management revenues increased in 1QFY15, total asset under management (AUM) stands at Rs 579.03 bn at the end of June 2014. While the mutual fund contributed to some of the growth, fees from the alternatives business arouse too.
  • Net interest margins (NIM) have remained at 4.0% levels in 1QFY15.
  • Other income sees a whopping increase to Rs 666 mn during 1QFY15 primarily on the back of higher trading income.
  • Bottom-line declines by 13.6% YoY in 1QFY15 and by 1.8% in YoY FY14 on account of weak income growth and higher provisioning.
  • Capital adequacy ratio stands at a robust 23.9% at the end of FY14 (Tier-1 ratio of 21.6%).
  • Net NPAs has remained at 0.4% at the end of June 2014.

Consolidated financial performance snapshot
Rs (m) 1QFY14 1QFY15 Change
Income from operations 22,980 21,225 -7.6%
Interest expended 12,775 13,021 1.9%
Net Interest Income  10,205 8,205 -19.6%
Net interest margin 4.1% 4.0%  
Other Income 6 666 11,589.5%
Operating expense 1,384 550 -60.3%
Provisions and contingencies 592 2,039 244.7%
Profit before tax 8,234 6,282 -23.7%
Tax 2,627 1,416 -46.1%
Effective tax rate 31.9% 22.5%  
Share of profit from associates 3 3  
Minority interest 37 51  
Profit after tax/ (loss) 5,573 4,817 -13.6%
Net profit margin (%) 24.3% 22.7%  
No. of shares (m)   1,517  
Book value per share (Rs)*   102.4  
P/BV (x)   1.5  
* (Book value as on 30th June 2014)

What has driven performance in 1QFY15
  • While the challenges pertaining to infrastructure sector continue to haunt IDFC’s books, the reform wheel set to be rolled out by the new government is expected to augur well for the infrastructure development. While the company is on the consolidation mode treading a cautious path, the business growth has been modest. Also, setting up a private bank will call for uncertainties in the medium term for the largest infrastructure financing company. While we continue to have a closer look at these challenges, we believe the benefits of transition into a bank will come few years down the line. Meanwhile, the company continues to consolidate its assets, combat the asset quality challenges and put the structure in place to prepare for the transition. .

  • The assets under management for the company grew at a robust pace reporting 19.1% YoY growth during 1QFY15. The total asset under management (AUM) stands at Rs 579.03 bn at the end of June 2014. While the mutual fund contributed to some of the growth, fees from the alternatives business arouse too.

    Funds under management (YoY comparison)
    Funds (Rs m) 1QFY14 1QFY15 Change
    IDFC Private Equity 44,560 38,370 -13.9%
    Fund I 750 -  
    Fund II 14,780 13,920  
    Fund III 29,030 24,450  
    IDFC Project Equity 38,370 83,560 117.8%
    IDFC AMC  403,270 449,620 11.5%
    IDFC Real Estate Yield Fund -  7,490  
    Total  486,200 579,040 19.1%

  • That the infrastructure activity is yet to pick up is no news. And that’s being reflected in the IDFC’s books. But the company is also treading a cautious path with restricting exposures to quality borrowers and consolidating its loan book. Therefore, both the sanctions and the disbursements have been witnessing a downward trajectory. While the sanctions pipeline has contracted by 78% YoY during FY14, the disbursements have declined by 28% YoY. Overall, the loan book reported 13% YoY de-growth during 1QFY15. Due to the slowdown in infrastructure sector, the company aims to change the loan mix and re-evaluate risk-adjusted returns. Moreover, a bank set-up in the near future would also imply pressures on the asset book of the company. However, we do not factor any numbers on this front as on today.

    Despite the fact that IDFC's balance sheet growth has been affected over the last two years, the company has retained its moat of being one of the biggest and profitable lenders to infrastructure with an eye on asset quality and shareholder returns. Moreover, the banking license privilege would bring in additional benefits in the long-run for the company if the new guidelines on infra lending citing regulatory exemptions are anything to go by.

    Significant slowdown in sanctions
    (Rs m) 1QFY14 1QFY15 Change
    Sanctions 31,150 9,880 -68.3%
    Disbursements 32,060 24,630 -23.2%
    D/S ratio 102.9% 249.3%  
    Advances 576,000 538,480 -6.5%

  • Moderation in loan growth has impacted the interest income for the first quarter of FY15. The income from operations has fallen by mere 7.6% YoY. Consequently the margins haven’t witnessed any improvement and have remained at 4% levels. The spreads for the quarter have been recorded at 2.8% levels.

  • The non-interest income for 1QFY15 has reported exponential growth at Rs 666mn. Backed by whopping trading income, the other income performance continues to remain strong for IDFC. However, loan related fees took a toll during the quarter and the asset management fees stood modest.

  • With infra activity and capex cycle is yet to pick up, asset quality may not put up a strong show. Yet the asset quality for IDFC has remained stable. While the gross NPAs have gone up to 0.6% in 1QFY15 from 0.3% in 1QFY14, the net NPAs too have gone up to 0.4% as against 0.2% a year ago. The loan loss reserves have moved up to 3.1% of the gross loan book in 1QFY15 as compared to 1.9% a year ago. On prudential grounds, the company has been proactively providing higher than the regulatory norm to avoid any major shortcomings in the future. While this might dent the short-term profitability of the company, the credit costs are expected to remain benign going forward.

  • Bank set-up, still underway: The strategic shift from a non-banking finance unit to a bank set-up will unlock value only few years down the line. Hence, we do not factor any numbers on this front at this juncture and await further clarity from the management. Nonetheless, the management has charted out roadmap to undertake banking business activity particularly in the next 18 months.
What to expect?
At the current price of Rs 156, the stock is valued at 1.3 times our FY17 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. The near term hiccups stand imminent as the company transitions into a bank. 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. We thus reiterate our BUY view on the stock with a long-term perspective.

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