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IDFC: In midst of a slowdown
Aug 2, 2011

IDFC declared its results for the first quarter of the financial year 2011-12 (FY12). The institution grew its income from operations by 24% and profits fell by 6% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated income from operations grows 24% YoY in 1QFY12, on the back of 30% YoY growth in advances. Gross Approvals and disbursements declined by over 50% YoY.
  • Net interest margins (NIM) improve marginally to 3.9% in 1QFY12, compared to 3.7% previously.
  • Asset management fees decreased 5% YoY, total asset under management (AUM) stands at Rs 388 bn at the end of June 2011.
  • Bottomline falls by 6% YoY in 1QFY12. Higher interest costs, tax outlays hurt profits.
  • Capital adequacy ratio stands at 24% at the end of 1QFY12, compared to 19% at the end of the previous quarter last year.


Rs (m) 1QFY11 1QFY12 Change
Income from operations 10,914 13,513 23.8%
Interest expended 4,852 7,539 55.4%
Net Interest Income  6,062 5,974 -1.4%
Net interest margin 3.7% 3.9%  
Other Income 58 66 13.7%
Operating expense 1,232 1,131 -8.2%
Provisions and contingencies 445 399  
Profit before tax 4,443 4,510 1.5%
Tax 1,098 1,378 25.5%
Effective tax rate 24.7% 30.6%  
Minority int/assoc 6 5  
Profit after tax/ (loss) 3,351 3,137 -6.4%
Net profit margin (%) 30.7% 23.2%  
No. of shares (m) 1,302 1,302  
Book value per share (Rs)*   88.7  
P/BV (x)   1.5  
* (Book value as on 30th June 2011)

What has driven performance in 1QFY12?
  • India's largest infrastructure financier, IDFC's saw its disbursements and approvals fall by over 50% YoY in 1QFY12. This was mainly due to the delay in implementing infrastructure projects, especially by the power and road sector. Projects are mainly getting stalled due to environment clearance issues in various states. IDFC saw a 30% YoY growth in its loan book in 1QFY12. However, its loan growth was flat sequentially, i.e. in the three months period from April to June 2011, indicating a slowdown in balance sheet growth at the start of the new financial year FY12.

  • The RBI's rampant interest rate hikes has led to a slowdown in economic activity. Slower GDP growth in the country and inaction on the infrastructure front are expected to lead to muted loan growth for the company in FY12 versus the 50% growth in advances seen in FY11. We have consequently been conservative in our estimates for loan growth in the current financial year, assuming flattish loan growth. Policy issues, environmental clearance delays, and coal linkage unavailability has impacted the performance of the power sector. IDFC's exposure to the power sector loans was around 44% at the end of 1QFY12, followed by transport at 26%, and telecom at 21%. The company‘s management expects a 15% growth in loans for FY12. It is looking at focusing on renewable energy projects and road transport projects in order to fuel its growth. It is also looking at broadening its focus to even fund even non-infra projects. We believe that the slowdown in loan growth is temporary in nature and will eventually pick up as reforms fall in place. The same is a certainty given the critical need and urgency of the infrastructure projects that IDFC is funding.

  • Its margins improved marginally, however higher interest costs ate into its profits, and the company registered a decline in its net interest income (NII) in 1QFY12. We expect NIMs to sustain at a slightly lower 3.5% levels going forward. Spreads (difference between the borrowing and lending rate) however came in a lower at 2.2% in 1QFY12, versus 2.7% in 1QFY11. The company increased borrowings by 24% YoY in 1QFY12 mainly through the long term funding route. Borrowings through bonds/debentures saw an increase in overall weightage from 61% previously to 63% currently. Borrowings through forex loans saw a 45% increase, with an overall weightage of 8% of total borrowings.

  • Asset management fees saw a 5% decline YoY, on account of a fall in income from the alternative investments desk. Investment banking (i-banking) and institutional broking income decreased by 47% YoY in 1QFY12. This was more in line with the general sentiment in the market. The market is not currently supportive of equity raising activities leading to a fall in income from i-banking. The company is however planning to monetize some capital gains from its investments in FY12, in order to improve its profitability in light of a balance sheet slowdown.

    Funds under management 1QFY12
    Funds US$ m Rs m
    IDFC Private Equity 1,000 44,570
    Fund I 100 2,850
    Fund II 300 12,690
    Fund III 600 29,030
    IDFC Project Equity 900 38,370
    IDFC AMC 6,800 305,370
    Total 8,700 388,310

  • The institution is currently adequately capitalised with CAR (capital adequacy) of 24% in 1QFY12 versus a regulatory requirement of CAR of as per its status as an Infrastructure Financing Company (IFC). The operating costs for the institution have decreased to 19% YoY, versus a cost to income ratio of 20% earlier. IDFC had 0.1% net NPA levels at the end of 1QFY12.

What to expect?
At the current price of Rs 125, the stock is valued at 1.6 times our estimated FY14 adjusted book value. The company is expected to witness a slowdown in balance sheet growth in FY12 on account of lower credit offtake in the infra space. Approvals and disbursements have taken a hit in 1QFY12. These were well anticipated given the policy inaction, environmental clearances and coal linkage issues that continue to dog the power sector. However, the company is going to try and focus on growth in the renewable energy space, and in road projects in order to fund its balance sheet growth. The company is also waiting for the government to expand its definition of infrastructure, so it can focus on newer areas. Irrespective, we have estimated flattish balance sheet growth for the year. Even, its other income buffer has fallen short, on account of volatility in the capital markets.

But, there is also a brighter side to it. Less than 30% of IDFC's funding currently comes from banks, which have all hiked their base rates substantially. The institution is able to access other cheaper sources of funding, and thus able to give its customers a better lending rate versus some banks. Most banks have also reached their ceilings on exposure to the infrastructure space. Thus, once the economy bounces back, IDFC is expected to be a key beneficiary. The institution has also been able to maintain its asset quality, and is not expected to see any pressure on the same going forward. IDFC has one of the highest capital adequacy ratios, and has high operating efficiency. The company also plans to monetize some capital gains in order to improve profitability for the year, even in light of a balance sheet slowdown. We thus reiterate our positive view on IDFC with a long-term perspective. While negative sentiments towards the infrastructure sector may prevail in the near to medium term, investors should reap the benefit of margin of safety in valuations of steady long term players like IDFC.

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