IDFC: Provisions, taxes squeeze profits - Views on News from Equitymaster

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IDFC: Provisions, taxes squeeze profits

Oct 29, 2012

IDFC declared the results for the second quarter and first half of financial year 2012-2013 (1HFY13). The company has reported 9% YoY growth in net interest income and 2.5% YoY growth in net profits for the first half. Here is our analysis of the results.

Performance summary
  • Consolidated income from operations grows 27% YoY in 1HFY13, on the back of 36% YoY growth in advances. Disbursements grow by 60% YoY, approvals by 5% YoY in 1HFY13.
  • Asset management fees grow 11% YoY, total asset under management (AUM) stands at Rs 371 bn at the end of September 2012.
  • Net interest margins (NIM) improve by 0.1% to 4.4% due to lower funding costs.
  • Other income drops by 62% YoY in 1HFY12 despite 38% YoY growth in loan related fees.
  • Bottomline grows marginally by 2.5% YoY in 1HFY13, due to rise in provisioning cost and higher effective tax rates..
  • Capital adequacy ratio stands at 21.5% at the end of 1HFY13, compared to 21.8% at the end of the June quarter.

Consolidated numbers...
Rs (m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Income from operations 17,155 20,386 18.8% 30,669 38,794 26.5%
Interest expended 8,260 11,898 44.0% 15,799 22,605 43.1%
Net Interest Income 8,895 8,488 -4.6% 14,870 16,189 8.9%
Net interest margin       4.3% 4.4%  
Other Income 2 16 700.0% 78 30 -61.5%
Operating expense 1,310 1,241 -5.3% 2,452 2,402 -2.0%
Provisions and contingencies 631 305 -51.7% 1,030 1,330 29.1%
Profit before tax 6,956 6,958 0.0% 11,466 12,487 8.9%
Tax 1,715 2,187 27.5% 3,092 3,900 26.1%
Effective tax rate 24.7% 31.4%   27.0% 31.2%  
Profit after tax/ (loss) 5,241 4,771 -9.0% 8,374 8,587 2.5%
Net profit margin (%) 30.6% 23.4%   27.3% 22.1%  
No. of shares (m)         1,513  
Book value per share (Rs)*         86.9  
P/BV (x)         1.8  
* (Book value as on 30th September 2012)

What has driven performance in 1HFY13?
  • While IDFC's saw its disbursements grow at an appreciable rate (60% YoY) in 1HFY13, approvals barely moved up by 5%. Three major areas where the financier is seeing traction from green-field projects are in the renewable energy, transmission and roads space. On the back of higher disbursements, IDFC saw a 36% YoY growth in its loan book in 1HFY13. Energy, transportation and telecom comprised 42%, 23% and 24% of outstanding disbursements at the end of September 2012 respectively. The management reiterated its guidance of 15-20% balance sheet growth for the year.

  • Policy issues, environmental clearance delays and coal unavailability continued to abate the growth of India's largest infrastructure financier. However there is some traction being seen on this front in terms of addressing losses of various State Electricity Boards (SEBs), power tariff hikes, and efforts from the administration on the fuel supply front.

  • IDFC margins (NIMs) improved marginally, from 4.3% to 4.4% in 1HFY13. Spreads (difference between the borrowing and lending rate) came in higher at 2.6% in 1HFY13, versus 2.4% in 1HFY12. The company increased borrowings by 36% YoY in 1HFY13 mainly through the long term funding route. Borrowings through bonds/debentures saw an increase in overall weightage from 63% previously to 69% currently. Borrowings through forex loans saw a 20% fall, with an overall weightage of 6% of total borrowings.

    Cautious growth...
    (Rs m) 1HFY12 1HFY13 Change
    Sanctions 139,010 145,270 4.5%
    Disbursements 65,430 104,870 60.3%
    D/S ratio 47.1% 72.2%  
    Advances 399,230 541,370 35.6%

  • The institution is currently adequately capitalised with CAR (capital adequacy) of 21.5% in 1HFY13 versus a regulatory requirement of 15% CAR of as per its status as an Infrastructure Financing Company (IFC). The cost to income ratio for the institution has remained unchanged at 16%, over the past 12 months. The institution expects this to remain in the 16-17% range going forward.

  • IDFC had 0.13% net NPA levels at the end of 1HFY13, thus it continues to maintain superior asset quality. But the rise in gross NPA levels to 0.3% of loan book seem to have entailed higher provisioning.

  • Asset management fees saw a 11% increase YoY, on account of a fall in income from the alternative investments desk. However this was compensated by some growth from the mutual fund arm. Investment banking (i-banking) and institutional broking income decreased. This was more in line with the general sentiment in the market. The market is still not currently supportive of equity raising activities leading to a fall in income from i-banking. Loan related fee income however saw significant traction, rising 38% YoY during the first half.

    Funds under management (at the end of Sept 2012)
    Funds US$ bn Rs m
    IDFC Private Equity 1.0 43,350
    Fund I 0.04 2,040
    Fund II 0.30 12,280
    Fund III 0.60 29,030
    IDFC Project Equity 0.9 38,370
    IDFC AMC 5.5 289,830
    Total 7.4 371,550

What to expect?
At the current price of Rs 158, the stock is valued at 1.6 times our estimated FY15 adjusted book value. Despite a tough macro environment, the company was still able to post a 36% growth in advances. However, the slow growth in approvals shows that sentiments are still cautious about infrastructure investments. Further recent policy reforms are yet to show any positive impact on key infrastructure related sectors.

IDFC has one of the highest capital adequacy ratios and high operating efficiency. Despite 32% rise in stock price over the past 4 months, we believe there are reasonable upsides left. We thus reiterate our BUY view on the stock with a long-term perspective. While negative sentiments towards the infrastructure sector may prevail in the near to medium term, investors should reap the benefit of steady long term players like IDFC.

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