IDBI: Continued topline pressure - Views on News from Equitymaster

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IDBI: Continued topline pressure

Oct 29, 2003

IDBI, the largest developmental finance institution in the country, has reported a disappointing September quarter performance. The institution has seen its topline fall by 16% in 2QFY04, while its bottomline has improved by 9%. The results are disappointing considering institution's encouraging performance in the June quarter of the current financial year. The 1HFY04 results have been salvaged to a certain extent by the June quarter results. For 1HFY04, while the institution's topline has fallen by 11%, the bottomline has grown by an encouraging 16%. The institution, however, continues to face pressure on the topline front.

(Rs m)2QFY032QFY04Change1HFY031HFY04Change
Income from Operations 20,350 17,200 -15.5% 37,000 32,950 -10.9%
Other Income 350 230 -34.3% 540 460 -14.8%
Interest Expenses 14,840 11,880 -19.9% 29,270 23,810 -18.7%
Net interest income 5,510 5,320 -3.4% 7,730 9,140 18.2%
Other Expenses 790 790 0.0% 1,390 1,380 -0.7%
Operating Profit 4,720 4,530 -4.0% 6,340 7,760 22.4%
Operating Profit Margin (%)23.2%26.3% 17.1%23.6% 
Provisions and Contingencies 3,930 3,500-10.9% 5,420 6,250 15.3%
Profit before Tax 1,140 1,260 10.5% 1,460 1,970 34.9%
Tax (10)10-200.0% (60) 210 -450.0%
Profit after Tax/(Loss) 1,150 1,250 8.7% 1,520 1,760 15.8%
Net Profit Margin (%)5.7%7.3% 4.1%5.3% 
No. of Shares (m) 653.0 653.0   653.0 653.0  
Diluted Earnings per share*7.07.7 4.75.4 
P/E Ratio    9.8 
*(annualised)      

The main reason for the institution's fall in topline has been its shrinking advances portfolio. In FY03, the institution saw a 4% fall in its advances portfolio. While poor credit offtake from the industrial sector has taken its toll on the institution's interest income, we believe that IDBI may be restructuring its loan portfolio and this may have led to a fall in advances disbursed. In 1HFY04 also, IDBI saw a 7% fall in disbursals indicating portfolio restructuring as well as competitive pressures. Banks seem to have slowly eaten into the target market of IDBI. Consequently, banks have improved their topline performance considerably by focusing on the retail sector where IDBI has almost no exposure.

In the September quarter, operating margins have improved, mainly due to a fall in interest costs. IDBI has been able to garner capital at an incremental cost of 7% in 1HFY04, compared to 9% in the same period last year, which has helped it to significantly reduce its interest expenses. It has been aggressively looking to revamp its borrowings portfolio in order to reduce the average cost of borrowing.

IDBI has been grappling with high NPAs and due to this, the institution has significantly increased its provisioning in the last two years. However in the September quarter, provisioning has fallen. This has also to an extent helped in the bottomline improvement. The institution has been receiving governmental aid for clearing its NPAs. This augurs well for an institution with large amount of NPAs in its books, however, It must be noted that it's NPAs are still fairly large enough to wipe out a significant part of its net worth.

At Rs 53, the stock is trading at a P/E multiple of 10x its annualised 1HFY04 earnings. IDBI has taken aggressive steps to tackle the issue of NPAs and has been helped to a great extent by the bailout package from the government. NPA concerns not withstanding, slow growth in disbursals is becoming a concern and this aspect has reared its head in the September quarter as indicated by the sharp fall in topline. However, the institution continues to take steps to reduce its expenses, both interest and otherwise. While the institution's restructuring plan in still pending, investors need to be cautious at this stage and wait for clearer signs of operational improvement in order to make an investment decision regarding IDBI.

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