IDFC: Growth is back in sanctions

IDFC declared its results for the first quarter of the financial year 2012-13 (1QFY13). The institution grew its income from operations by 36% and profits grew by 21% YoY. Here is our analysis of the results.

Performance summary

• Consolidated income from operations grows 36% YoY in 1QFY13, on the back of 34% YoY growth in advances. Gross approvals doubled and disbursements increased by 55% YoY.
• Net interest margins (NIM) improved from 4.2% in 1QFY12 to 4.4% currently.
• Asset management fees decreased 3% YoY, total asset under management (AUM) stands at Rs 365 bn at the end of June 2012.
• Bottomline grows by 21% YoY in 1QFY13 on the back of robust growth in net interest income and slow growth in provisions.
• Capital adequacy ratio stands at a robust 21.8% at the end of 1QFY13, with a Tier 1 ratio of 19.5%.

Rs (m)	1QFY12	1QFY13	Change
Income from operations	13,514	18,408	36.2%
Interest expended	7,539	10,706	42.0%
Net Interest Income	5,976	7,702	28.9%
Net interest margin	4.2%	4.4%
Other Income	76	14	-81.3%
Operating expense	1,144	1,770	54.7%
Provisions and contingencies	397	416	4.6%
Profit before tax	4,510	5,530	22.6%
Tax	1,378	1,713	24.4%
Effective tax rate	30.6%	31.0%
Minority int/assoc	5	(19)
Profit after tax/ (loss)	3,137	3,798	21.1%
Net profit margin (%)	23.2%	20.6%
No. of shares (m)		1,513
Book value per share (Rs)*		83.8
P/BV (x)		1.7

* (Book value as on 30th June 2012)

What has driven performance in 1QFY13?

• India's largest infrastructure financier, IDFC's saw its disbursements and approvals grow appreciable in 1QFY13. Approvals doubled to Rs 117 bn and disbursements saw a 55% growth YoY in 1QFY13. However, this was on a lower base seen same time last year. Three major areas where the financier is seeing traction from green-field projects are in the renewable energy, transmission and roads space. IDFC saw a 34% YoY growth in its loan book in 1QFY13. However, the management reiterates its guidance of 15-20% balance sheet growth for the year.

• Policy issues, environmental clearance delays, and coal linkage unavailability has impacted the performance of the power sector. However there is some traction being seen on this front in terms of addressing losses of various State Electricity Boards (SEBs), power tariff hikes, and efforts from the administration on the fuel supply front. IDFC's exposure to the power sector loans was around 41% at the end of 1QFY13, followed by transport at 24%, and telecom at 23%.

• IDFC margins (NIMs) improved marginally, from 4.2% to 4.4% in 1QFY13. Spreads (difference between the borrowing and lending rate) came in higher at 2.5% in 1QFY13, versus 2.2% in 1QFY12. The company increased borrowings by 29% YoY in 1QFY13 mainly through the long term funding route. Borrowings through bonds/debentures saw an increase in overall weightage from 63% previously to 66% currently. Borrowings through forex loans saw a 30% increase, with an overall weightage of 8% of total borrowings.

• Asset management fees saw a 3% increase YoY, on account of a fall in income from the alternative investments desk. However this was compensated by some growth from the mutual fund arm. Investment banking (i-banking) and institutional broking income decreased by 38% YoY in 1QFY13. This was more in line with the general sentiment in the market. The market is still not currently supportive of equity raising activities leading to a fall in income from i-banking. Loan related fee income however saw significant traction, rising 78% YoY during the quarter.
  Dynamic growth...

  (Rs m)	1QFY12	1QFY13	Change
  Sanctions	57,990	117,440	102.5%
  Disbursements	29,040	45,020	55.0%
  D/S ratio	50.1%	38.3%
  Advances	375,230	501,570	33.7%

  
  
• The institution is currently adequately capitalised with CAR (capital adequacy) of 21.8% in 1QFY13 versus a regulatory requirement of 15% CAR of as per its status as an Infrastructure Financing Company (IFC). The operating costs for the institution have decreased to 16.7% YoY, versus a cost to income ratio of 20.6% earlier. The institution expects this to remain in the 17% range going forward. IDFC had 0.14% net NPA levels at the end of 1QFY13, thus it continues to maintain superior asset quality.

What to expect?

At the current price of Rs 142.2, the stock is valued at 1.4 times our estimated FY15 adjusted book value. Despite a tough macro environment, the company was still able to post a 34% growth in advances. However, the management reiterates its guidance of 15-20% asset growth. The company is confident of growing its balance sheet at these levels over the next few years, without sacrificing margins. Approvals and disbursements have seen a comeback this quarter, however this was on a lower base seen last year. While policy inaction, environmental clearances and coal linkage issues continue to dog the power sector, there have been more efforts from the administration to try and remedy the situation on the ground.

IDFC is going to try and focus on growth in the renewable energy space, transmission projects and in road projects in order to fund its balance sheet growth. It plans to reduce exposure to the power sector on a long term basis and this share has been coming down. The institution has also been able to maintain its asset quality, and is not expected to see significant pressure on the same going forward as its loan book is of a very good quality. It currently has loan loss reserves of 1.6% which shall be able to tide it through any short term pains. The institution currently has 2% of its portfolio as restructured assets. It may reschedule some of the payment terms of a few more projects over the next few quarters. However this is not a sign that asset quality will dip.

IDFC has one of the highest capital adequacy ratios and high operating efficiency. We thus reiterate our BUY 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.