IFCI NPAs destroying value - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

IFCI NPAs destroying value

Sep 2, 2000

IFCI (Industrial Finance Corporation of India), India's third largest financial institution is a specialised project finance institution promoted by the Government of India in 1948. Although the institution offers a number of services, its financials are deteriorating year over year.The institution provides long-term finance to corporates for their capital expenditure plans and has plans to enter into short end of the finance business. It also runs a financial service division, which offers merchant banking, loan syndication and advisory services. During FY00, sanctions of IFCI declined by 47% to Rs 23.7 bn while disbursements were lower by 32% to Rs 32.6 bn. Textiles accounted for 19% and steel accounted for 12% of the sanctions accorded in FY00. As these industries witnessed a lower growth during the year, in terms of addition of new capacities, the sanctions reflected a negative growth rate.

Rising non-performing assets (NPAs) have affected the profits of the company adversely. The high share of project finance in IFCIs portfolio at over 90% has been a major contributor to the NPAs. The NPAs amounted to Rs 41 bn as on March 2000, constituting 20.7% of the total net assets. The textile and synthetic fibre/yarn industry together with iron and steel have been the major contributor to the extent of 50% of the outstanding amount in respect of top 100 NPAs in FY00.

In a bid to reduce its NPA ratio to 15.2% by the end of current years, IFCI has taken a conscious decision not to take up financing of any new green-field steel project. It has appointed an expert committee on restructuring to examine the asset liability management and the causes for NPAs. A corporate monitoring department has been set up to oversee and monitor cases with large exposures as well as likely default cases.

Declining growth
Year ended March (Rs m)FY97FY98FY99FY2000
Operating income25,68525,85128,01928,982
Other income139166866671
Interest Expended17,75719,56523,68425,357
Operating profit7,9286,2864,3353,625
Provision & contingencies1,7312883,0891,949
Profit before tax4,6264,545235594
Extraordinary items0000
Tax84084000
Profit after tax3,7863,705235594
Number of shares354354354640
Key Ratios    
Operating margin (excl. O.I.)30.9%24.3%15.5%12.5%
Net profit margin14.7%14.3%0.8%2.0%
Fully Diluted EPS (Rs)10.710.50.70.9

In the past three years, IFCIs returns have been continuously declining due to increasing cost of borrowings and stagnant yield on advances. As a result its interest spread has been declining consistently. The market has rated IFCI bonds to have a higher risk premium as compared to its peers ICICI and IDBI resulting in higher cost of funds. Also the institution lags behind in terms of transparency. Its balance sheet does not give a clear picture of the amount of its non-performing assets sector wise.

Declining returns
ParticularsFY97FY98FY99FY2000
Interest spread 3.6%1.7%0.5%0.2%
RONW 22.2%21.8%1.4%3.0%
ROA 9.6%8.4%0.5%1.0%
ROIC 3.6%2.3%1.4%1.1%

At the current market price of Rs 6, IFCI is trading at a P/E ratio of 6.6 times its FY00 earnings. (historical P/e in the range of 16-20 times) The above stated negatives are factored in its lower valuations. The institution will have to improve its asset quality with focussed management and reshuffle the loan portfolio by increasing its allocation in favour of emerging sectors like software and telecom. Improvement in financial performance and NPA ratio can bring re-rating in the stock.

Equitymaster requests your view! Post a comment on "IFCI NPAs destroying value". Click here!

  

More Views on News

The Affordable Housing Boom Could Boost these 5 Stocks for Years to Come... (Views On News)

Oct 20, 2021

With record low interest rates and numerous discounts and schemes by real estate companies, the affordable housing boom is here to stay.

6 Debt Free Penny Stocks with Solid Growth (Views On News)

Oct 2, 2021

Penny stocks which have a decent balance sheet, low or zero debt and a track record for paying consistent dividend fare much better against their peers.

3 Stocks Riding the Fintech Megatrend in India (Views On News)

Sep 29, 2021

India's fintech industry, valued at US$31 bn, is projected to grow to US$84 bn by 2025.

HDFC Shares Rise as Loan Disbursements Jump 181% (Views On News)

Aug 2, 2021

The company witnessed a growth in both the affordable housing and premium segment as lockdown restrictions eased.

Bajaj Finance Stock Springs a Surprise. Gains 5% Despite Disappointing Results (Views On News)

Jul 22, 2021

Bajaj Finance's Q1 performance was muted because of lockdowns but the company has made higher provisions.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.

How to Find Your Next 10-Bagger in this Market (Profit Hunter)

Nov 19, 2021

The #1 make or break factor in your portfolio you shouldn't ignore.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

IFCI SHARE PRICE


Nov 29, 2021 (Close)

TRACK IFCI

COMPARE IFCI WITH

MARKET STATS