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IDBI: Recovering giant

Aug 5, 2003

IDBI, the largest developmental finance institution in the country, continues to face topline pressure, while on the bottomline front, the performance showed continued improvement in the June quarter. The financial institution (FI) reported significant improvement in its operating margins. For 1QFY04, the FI has reported a 34% improvement in bottomline on the back of a 5% fall in topline. The institution's efforts at reducing capital costs are bearing fruits.

(Rs m) 1QFY03 1QFY04Change
Income from Operations 16,650 15,750 -5.4%
Other Income 190 230 21.1%
Interest Expenses 14,420 11,930 -17.3%
Net interest income 2,230 3,820 71.3%
Other Expenses 600 590 -1.7%
Operating Profit 1,630 3,230 98.2%
Operating Profit Margin (%)9.8%20.5%
Provisions and Contingencies 970 2,300137.1%
Depreciation 520 45015.6%
Profit before Tax 330 710 115.2%
Tax (50)200
Profit after Tax/(Loss) 380 510 34.2%
Net Profit Margin (%)2.3%3.2%
No. of Shares (m) 653.0 653.0
Diluted Earnings per share* (Rs)3.12.3
P/E Ratio (x)14.7
*(annualised)

While poor credit offtake from the industrial sector has taken its toll on the institution's interest income, we believe that IDBI may be restructuring its loan portfolio and this may have led to a fall in advances disbursed. Disbursals had reduced in FY03 taking a toll on interest income. Apart from that, banks seem to have slowly eaten into the target market of IDBI. Consequently, banks have improved their topline performance considerably by focusing on the retail sector where IDBI has almost no exposure.

The main highlight of the institution's performance in the June quarter has been the significant improvement in operating margins. IDBI has been able to significantly reduce its interest expenses. It has been aggressively looking to revamp its borrowings portfolio in order to reduce the average cost of borrowing. In the June quarter, IDBI has managed to reduce its borrowing cost to 6.9% from 9.3% in the same period last year. The management has indicated that the institution has retired close to Rs 230 bn worth of high cost debt, which has led to a Rs 4.6 bn fall in interest expenses. Improvement in operating margins has been primarily due to the fall in interest expenses and to a limited extent, also due to the fall in other expenses.

IDBI has been grappling with high NPAs and due to this, the institution has significantly increased its provisioning in the last two years. Even in the June quarter, provisioning has been strong. The institution has been receiving governmental aid for clearing its NPAs. This augurs well for an institution with large amount of NPAs in its books. It must be noted that this institution's NPAs are still fairly large enough to wipe out a significant part of its net worth.

At Rs 46, the stock is trading at a P/E multiple of 15x its annualised 1QFY04 earnings. IDBI has taken aggressive steps to tackle the issue of NPAs and has been helped to a great extent by the bailout package from the government. NPA concerns not withstanding, slow growth in disbursals is becoming a concern. However, the institution is slowly winning back investor confidence by taking steps to reduce its expenses, both interest and otherwise. Investors need to closely watch IDBI's restructuring plan that the Parliament is likely to approve shortly. This will determine the future of this troubled but recovering institution.

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