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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 IFCI’s 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
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, IFCI’s 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
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.

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