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How do infra bonds impact IDFC's future? - Views on News from Equitymaster
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How do infra bonds impact IDFC's future?
Sep 30, 2010

With the aim to channelise the vast quantum of domestic savings into India's infrastructure, the government accorded Infrastructure Financing Company (IFC) status to certain institutions. With the new IFC status, classified institutions can issue tax-free bonds to retail investors, raise cheap overseas funds (ECBs) and provide additional loans to certain borrowers.

We recently attended the launch of IDFC's Rs 34 bn infrastructure bond issue. The company has been authorised to raise this amount until March 31st 2011. It will be initiating the first offering of long-term infrastructure bonds to retail investors.

IDFC has recently bolstered its capital base with its Rs 35 bn QIP and a preferential allotment. Its current capital adequacy ratio stands at 26%, post the equity placement. It is adequately capitalised to grow at 35-40% over the next 3-4 years, according to company management.

The offering

The company plans to offer four series of bonds, each with a face value of Rs 5,000. The maturity of these bonds is over a ten year period; however they have a 5 year lock-in period. During this 5 year period the bonds have no liquidity and they cannot be pledged or used as collateral. Post the 5 year period, they can be traded on NSE or BSE.

IDFC Bonds
Series 1 2 3 4
Interest payment Annual Cumulative Annual Cumulative
Yield on maturity 8% p.a. 8% compounded annually 7.5% p.a. 7.5% compounded annually
Maturity 10 years 10 years 10 years 10 years
Buyback option No No Yes (in 5 years) Yes (in 5 years)
Buyback amount NA NA Rs 5,000/bond Rs 7,180/bond
Maturity amount/bond Rs 5,000 Rs 10,800 Rs 5,000 Rs 10,310
Source: IDFC bond issue prospectus

Under a new Section 80CCF of the Income Tax Act, an individual is allowed a deduction of up to Rs 20,000 on taxable income for the current fiscal. This deduction is over and above the 100,000 deduction available currently under various sections. The effective yield for these bonds will be even higher than 7.5% or 8% coupon due to the additional tax benefits.

Issue Proceeds

The company plans to use the funds to help growth its core business of infrastructure financing. The money will be used to grow its asset book, which the company aims to triple over the next three years.

IDFC and private investment in infrastructure

Total investment in the infrastructure space has increased from 4.3% of the GDP in 2000 to around 8% in 2010. Out of the 8% around 3.5-3.7% has come from the private sector. This means that around 50% of every incremental rupee in Indian infrastructure is being funded by the private sector. The private sector has show an increased ability and willingness to invest in core infrastructure and projects which are commercially viable. Thus IDFC's enhanced ability to increase the share of private sector participation in infrastructure investment through this bond issue is a long term positive.

Source: IDFC bond issue prospectus

What to expect?
At the current price of Rs 200, the stock is valued at 1.6 times our estimated FY13 adjusted book value. We reiterate our positive view on the stock. Research Pro subscribers can click Here.

With the aggressive fundraising that the company is doing post receiving the IFC status, we believe that the company is well set to growth its loan book at a rapid pace. Infra assets (power plants, telecom towers etc) once built usually provide annuity type cash flows. The company has also managed negligible NPAs (0.2% at the end of 1QFY11) on its infrastructure investments, showing good asset quality.

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