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IDFC: Taking a step back - Views on News from Equitymaster
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IDFC: Taking a step back
Oct 22, 2008

Performance summary
  • Interest income grows 43% YoY in 1HFY09, on the back of 25% YoY growth in advances; disbursements drop by 7.4% YoY.

  • Disbursement to sanction ratio drops from 68% in 1HFY08 to 55% in 1HFY09

  • Net interest margins drop to 2.7% in 1HFY09 due to higher costs.

  • Non-interest income grows by 30% due to growth in AMC related fees and loan related fees.

  • Bottomline grows by 18.4% YoY despite higher provisioning.

Consolidated numbers…

Rs (m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Interest income 6,551 9,397 43.4% 12,647 18,083 43.0%
Interest expended 3,306 5,219 57.9% 6,417 10,086 57.2%
Net Interest Income 3,245 4,178 28.8% 6,230 7,997 28.4%
Net interest margin       2.9% 2.7%  
Other Income 16 68 325.0% 17 87 411.8%
Operating expense 499 929 86.2% 996 1,698 70.5%
Provisions and contingencies 164 148 -9.8% 228 347 52.2%
Profit before tax 2,598 3,169 22.0% 5,023 6,039 20.2%
Tax 621 833 34.1% 1,203 1,518 26.2%
Effective tax rate 23.9% 26.3%   23.9% 25.1%  
Profit after tax/ (loss) 1,977 2,336 18.2% 3,820 4,521 18.4%
Net profit margin (%) 30.2% 24.9%   30.2% 25.0%  
No. of shares (m)       1,294 1,295  
Book value per share (Rs)*         46.7  
P/BV (x)         1.2  
* On a trailing 12-months earnings basis

What has driven performance in 2QFY09?
  • IDFC has concluded the first half of the fiscal on a robust note with a pipeline of Rs 38 bn of un-disbursed but sanctioned loans. The institution has clearly prioritised its goals into – liquidity, profitability and growth. This has resulted in the institution cutting back on its incremental disbursement despite sufficient capital adequacy (22.2% in 1HFY09) and 14% growth in incremental sanctions. The loan during the half year is marginally lower than our full year estimate of 27% YoY.

  • The institution clocked 25% YoY growth in advances which was nearly half as compared to the same period last year. The disbursement to sanction ratio fell from 68% in 1HFY08 to 55% in 1HFY09. Inability to pass on the rate hikes to its borrowers has also taken a toll, albeit marginal on IDFC’s NIMs (2.7% in 1HFY09). We have assumed the same to be at 2.5% for the full year.

    Going slow...

    (Rs m) 1HFY08 1HFY09 Change
    Sanctions 74,200 84,550 13.9%
    Disbursements 50,340 46,630 -7.4%
    D/S ratio 67.8% 55.2%  
    Advances 174,110 216,710 24.5%

  • The share of non-interest income to IDFC’s total income remained stable at 47% despite lower treasury and investment banking income. The institution also clarified that in case of loans disbursed against shares of companies, a loan to value ratio of 2 times is maintained. The volatility in share prices have therefore not impacted IDFC’s asset book.

  • Asset management fees comprised 20% of the total fee income (13.5% in 1QFY09) generating returns of 0.7% on the total invested corpus of US$ 2.3 bn. The same has doubled with incremental revenues from Stanchart’s asset management business (IDFC AMC). Investment banking and broking income have fallen by 20% YoY.

    Funds under management

      1QFY09 2QFY09 Change
    Funds US$ m Rs m US$ m Rs m  
    IDFC Private Equity 630 27,090 1,300 28,320 4.5%
    Fund I 190 8,170 180 8,440 3.3%
    Fund II 440 18,920 420 19,880 5.1%
    Fund III     700 32,860  
    IDFC Project Equity 523 22,470 870 35,890 59.7%
    IDFC AMC 2,451 114,000 2,260 106,460 -6.6%
    IDFC Investment Advisory 33 1,430 20 1,060 -25.9%
    Total 3,637 164,990 4,450 171,730 4.1%

  • The institution is currently adequately capitalised and needs to maintain minimum CAR of 15% as per the RBI norms. The operating costs for the institution have also increased by 71% YoY in 1HFY09 (cost to income ratio of 21.5%), with the additional employee intake. IDFC continued to maintain zero net NPA levels

What to expect?
At the current price of Rs 58, the stock is very attractively valued at 0.9 times our estimated FY11 adjusted book value. With one of the highest capital adequacy ratios, highest operating efficiency and one of the best return ratios; we reiterate our positive view on the company with a long-term perspective. Having said that, if the asset growth continues to remain at lower levels (as compared to our estimates) we may have to revise our estimates downwards for the year going forward.

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