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IDFC: Disbursements pick up pace - Views on News from Equitymaster
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IDFC: Disbursements pick up pace
Aug 4, 2010

IDFC declared its 1QFY11 results. The institution grew its interest income and profits by 10% and 22% YoY respectively. Here is our analysis of the results.

Performance summary
  • Consolidated income from operations grows 10% YoY in 1QFY11, on the back of 39% YoY growth in advances. Disbursements grow by 302% YoY, approvals by 199% YoY in 1QFY11.
  • Asset management fees decreased 10% YoY, total asset under management (AUM) stands at Rs 321 bn at the end of June 2010.
  • Net interest margins (NIM) improve by 0.2% due to lower funding costs.
  • Other income grows by 151% YoY due to higher Income from principal investments and loan related fees.
  • Bottomline grows by 22% YoY in 1QFY11.
  • Capital adequacy ratio stands at 19.1% at the end of 1QFY11, compared to 21.9% at the end of the previous quarter last year.

Consolidated numbers...
Rs (m) 1QFY10 1QFY11 Change
Income from operations 9,923 10,914 10.0%
Interest expended 5,267 4,852 -7.9%
Net Interest Income 4,655 6,062 30.2%
Net interest margin 3.1% 3.3%  
Other Income 23 58 151.2%
Operating expense 1,026 1,232 20.1%
Provisions and contingencies (66) 445  
Profit before tax 3,718 4,443 19.5%
Tax 973 1,098 12.8%
Effective tax rate 26.2% 24.7%  
Profit after tax/ (loss) 2,745 3,345 21.9%
Net profit margin (%) 27.7% 30.6%  
No. of shares (m) 1,295 1,302  
Book value per share (Rs)*   53.9  
P/BV (x)   3.5  
* (Book value as on 30th June 2010)

What has driven performance in 1QFY11?
  • Thanks to a robust pick-up in demand for funding for infrastructure investment and banks’ reluctance to fund long term assets with their short term liabilities, IDFC saw its sanctions grow by 199% YoY. The growth in disbursements and loan book was at 302% and 39% YoY respectively. Ability to borrow at cheaper rates has helped IDFC improve its NIMs to 3.3% (3.1% in 1QFY10). The company does not have a large proportion of bank borrowings, therefore the impact due to the base rate regime will be minimal.

    Dynamic growth...
    (Rs m) 1QFY10 1QFY11 Change
    Sanctions 43,610 130,460 199.2%
    Disbursements 15,420 62,040 302.3%
    D/S ratio 35.4% 47.6%  
    Advances 208,540 289,010 38.6%

  • IDFC was the first institution to be granted status as an infrastructure financing company (IFC) this quarter. The company can now avail of ECBs (external commercial borrowings) upto 50% of its networth. The company can also issue tax free infrastructure bonds. At the results’ conference call, the management gave an indication that they are seriously looking into these alternative and cheaper sources of financing.

  • The share of non-interest income to IDFC’s total income increased by 22% in 1QFY11. Principal investments saw good gains, especially on the infrastructure side.

  • Asset management fees saw a 10% decline YoY due to some exits in private equity and project equity in the last quarter. There was no management fee earned on these investments. Plus mutual fund (assets under management) AUM for the June quarter were soft as a result of 3G outlays and advance tax payments. Investment banking operations had a 19% increase. Institutional broking income, however, saw a 33% decline. This was mainly due to market phenomenon, where there was a push towards futures and options instead of the traditional cash market operations. The company did not see the decline due to a loss of market share, as indicated in the company conference call.

    Funds under management 1QFY11
    Funds US$ m Rs m
    IDFC Private Equity 1,290 59,920
    Fund I 200 8,440
    Fund II 400 19,880
    Fund III 700 31,600
    IDFC Project Equity 800 38,370
    IDFC AMC 4,800 222,450
    Total 6,890 320,740

  • The institution is currently adequately capitalised with CAR of 19.1% in 1QFY11 and it needs to maintain minimum CAR of 15% by March 2011 as per the RBI norms, as well as its new IFC status. The operating costs for the institution have also increased by 20% YoY (cost to income ratio of 20%). IDFC had 0.2% net NPA levels at the end of 1QFY11. The company recently completed a QIP and a preferential issue (totaling Rs 35 bn) to existing investors Khazana and Actis. This will help augment its capital base in order to grow its loan book further as well as raise ECBs.

What to expect?
At the current price of Rs 184, the stock is valued at 2.2 times our estimated FY13 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 IDFC with a long-term perspective. (Research Pro subscribers can view our latest update on the company here) The company indicated in its conference call that it can sense some decline in spreads in the tightening liquidity cycle, however growth in loan book should offset this decline. The company should also be able to see some benefits due to its newly instated IFC status.

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