IDFC: Prodigy in the making - Views on News from Equitymaster

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IDFC: Prodigy in the making

Aug 22, 2005

Performance summary
In its maiden disclosure of quarterly results after having got listed on the exchanges, IDFC did not disappoint its investors, having posted a handsome 113% YoY jump in bottomline for 1QFY06. The profit expansion, albeit on a lower base, was contributed by both core infrastructure lending and treasury activities of the entity. High provisioning also seems to have had a very trivial dampening effect on the margins.

Rs (m) 1QFY05 1QFY06 Change
Income from operations 1,040 1,922 84.8%
Other Income 346 642 85.4%
Interest Expense 665 1,117 68.0%
Net Interest Income 375 805 114.5%
Other Expense 70 77 10.0%
Operating Profit 305 728 138.5%
Operating profit margin (%) 29.3% 37.9%  
Provisions and contingencies 82 204 148.8%
Profit before tax 569 1,165 104.7%
Tax 60 83 38.3%
Profit after tax/ (loss) 509 1,082 112.6%
Net profit margin (%) 48.9% 56.3%  
No. of shares (m) 1,000 1,002  
Diluted earnings per share (Rs)* 2.0 4.3  
P/E (x)   16.0  
* (annualised)      

A headstart in infrastructure funding
Established in 1997 as a private sector enterprise by a consortium of public and private investors, IDFC operates as a professionally managed infrastructure financing entity whose focus areas are energy, telecommunications, transportation and industrial and commercial projects. IDFC financed 25% of the total infrastructure outlay in the country in FY05. Its expertise in the infrastructure sector and strong relationships with government and infrastructure sponsors, provide it with a platform for facilitating private investment and public-private partnerships in infrastructure projects in sectors where market structures, government policy and regulations are evolving. The company's clients include prominent participants in infrastructure development and it has capitalised on its domain knowledge and structuring expertise in financing activities to garner fee-based revenues. The company had its initial public offering in July 2005.

What has driven performance in 1QFY06?
Balanced growth:  IDFC has witnessed a balanced growth in revenues from both infrastructure lending (83% YoY) and treasury operations (103% YoY) in 1QFY06. The core lending growth has been on the back of 14% growth in approvals and 11% growth in disbursals. Till the end of 1QFY06, IDFC had approved financial assistance for 206 projects aggregating Rs 265 bn and had made disbursements (for 123 projects) to the tune of Rs 114 bn. The institution, therefore, has a disbursal to sanction ratio of 43%, which is expected to improve given the availability of sufficient capital going forward. But its repayment ratio of 28% stands higher than that of HDFC (12% to 15%).

Segmental breakup
(Rs m) 1QFY05 % of total 1QFY06 % of total Change
Revenue 1,385   2,562   85%
(i)Infrastructure 1,277 92.2% 2,343 91.5% 83%
(ii)Treasury 108 7.8% 219 8.5% 103%
Profits 619   1,214   96%
(i)Infrastructure 659 106.5% 1,206 99.3% 83%
(ii)Treasury (40) -6.5% 8 0.7% 120%

Around 25% of the total income was garnered through non-interest sources in 1QFY06 and the company is focusing on this segment to insulate its future growth from the vagaries of interest rate movements. Going forward, as the risk weightage on its asset profile (infrastructure advances) reduces, with projects nearing completion and revenue streams getting unlocked, IDFC plans to securitise them to asset hungry financial entities at a premium. Also, income from its advisory services (comprising 5% of income from operations in FY05) is expected to grow in tandem with its topline and serve as a major contributor to the company's financials going forward.

Higher realisations:  IDFCs return on assets (RoA) increased from 3.4% in 1QFY05 to 4.8% in 1QFY06. Since the institution witnessed a contraction in the average spread on infrastructure lending from 3.3% in 1QFY05 to 2.3% in 1QFY06, the increase in RoA can be largely attributed to the profits realized on proprietary equity investments and a higher contribution of fee based income. The entity, however, continues to enjoy the highest return ratios in the sector.

Clean assets:  IDFC has one of the strongest asset quality positions amongst the financial entities in India (rivaled only by HDFC and HDFC Bank). The company employs extensive screening and financial analysis to assess potential risks of the projects under scrutiny and devises appropriate risk mitigation mechanisms. Due to this, it had lower than 1% gross NPAs and nil net NPAs at the end of FY05. Also, since a major chunk of such advances are concentrated on the top 5 borrowers in each sector, IDFC's books remain reasonable well hedged.

What to expect?
At the current price of Rs 67, the stock is trading at 3.5 times its FY05 adjusted book value. Given its impressive growth history (CAGR of 31% in assets, 50% in topline and 21% bottomline over the past 5 years) and asset quality, the valuations look attractive compared to most of its peers in the industry. While the premium valuations accorded to the entity seem to have completely factored in its future growth prospects, the sustenance of the same remains dependant on its ability to capitalise on the infrastructure lending opportunities in the country.

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