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IDFC: Slowdown hits hard - Views on News from Equitymaster

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IDFC: Slowdown hits hard
Nov 3, 2013

IDFC declared its results for the second quarter and first half of the financial year 2013-14 (FY14). The institution grew its income from operations and profits by 5.3% and 2.5% YoY respectively. The profits for the first half grew at robust 22.1% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated income from operations grows 5.3% YoY in 2QFY14 and 14.7% YoY for 1HFY14. While advances grew 3% YoY, the disbursements fell during 2QFY14. This was largely on account of slowdown in infrastructure activity and other macro turbulences.
  • Total asset under management (AUM) stands at Rs 486 bn at the end of September 2013. While the mutual fund contributed to majority of the growth, fees from the alternatives business did not show up an impressive performance.
  • Net interest margins (NIM) remains stable at 4.1% during 1HFY14.
  • Bottom-line grows by mere 2.5% YoY in 2QFY14 mainly on account of higher provisioning.
  • Net NPAs come in at 0.2% at the end of September 2013.
  • Capital adequacy ratio stands at a robust 23.9% at the end of 2QFY14 (Tier-1 ratio of 21.6%).

Consolidated financial performance
Rs (m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Income from operations 20,369 21,454 5.3% 38,713 44,398 14.7%
Interest expended 11,899 12,604 5.9% 22,605 25,379 12.3%
Net Interest Income 8,470 8,850 4.5% 16,109 19,018 18.1%
Net interest margin       4.1% 4.1%  
Other Income 34 37 8.6% 111 78 -29.5%
Operating expense 1,241 1,375 10.7% 2,401 2,759 14.9%
Provisions and contingencies 305 501 64.0% 1,331 1,092 -17.9%
Profit before tax 6,957 7,011 0.8% 12,488 15,245 22.1%
Tax 2,188 2,099 -4.0% 3,901 4,726 21.2%
Effective tax rate 31.4% 29.9%   31.2% 31.0%  
Minority int/assoc (13) (44)   (33) (78)  
Profit after tax/ (loss) 4,754 4,870 2.5% 8,554 10,441 22.1%
Net profit margin (%) 23.3% 22.7%   22.1% 23.5%  
No. of shares (m)         1,516  
Book value per share (Rs)*         97.3  
P/BV (x)         0.9  
* (Book value as on 30th September 2013)

What has driven performance in 2QFY14?
  • Given the economic slowdown, the infrastructure activity has taken a toll. Consequently, the project pipeline has remained weak since more than 18 months now. This has clearly reflected in the business growth of IDFC. The credit off-take remained muted both during 1HFY14 and 2QFY14 as the total loans grew by mere 3% YoY. While the approvals have gone up on account of few telecom related corporate loans, the disbursements have come down by 46.1% in 1HFY14.

    Significant slowdown in disbursements
    (Rs m) 1HFY13 1HFY14 Change
    Approvals 145,270 149,760 3.1%
    Disbursements 104,870 56,500 -46.1%
    D/S ratio 72.2% 37.7%  
    Advances 541,370 559,570 3.4%

  • The assets under management (AUMs) for the quarter grew by healthy 30.7% YoY primarily on the back of whopping AMC business growth during 2QFY14. Given the unstable market conditions, the project equity business has barely picked up; while the private equity business growth declined during the second quarter of FY14.

    Funds under management
    Funds (Rs m) 2QFY13 2QFY14 Change
    IDFC Private Equity 43,350 39,690 -8.4%
    Fund I 2,040 470  
    Fund II 12,280 14,780  
    Fund III 29,030 24,450  
    IDFC Project Equity 38,370 38,370 0.0%
    IDFC AMC 289,830 407,730 40.7%
    Total 371,550 485,790 30.7%

  • Margins have remained stable at 4.1% levels during the first half of FY14. However, going forward, owing to tepid credit off-take, the compression in spreads stand imminent.

  • The operating costs for the quarter have gone up by 10.7% YoY while for the first half of FY14, it grew 14.9% YoY. That said, the company holds stable operational efficiency for quite some time now.

  • The asset quality deteriorates for first half of FY14. The gross NPAs have inched upwards from 0.28% in 1HFY13 to 0.39% in 1HFY14. The gross NPAs at 0.3% levels were reported during second quarter as well. Therefore, the provisions too shot up by almost 64.0% YoY. That said the company boasts of one of the best asset quality in the sector despite the macro turbulences. Also, the management continues to focus on credit quality; even if it means sacrificing growth so as to contain any slippages as observed during 2QFY14.

  • The company stands adequately capitalized with total capital adequacy ratio at 23.9% for the quarter ended September 2013. The Tier I at 21.6% stands healthy.
What to expect?
At the current price of Rs 110, the stock is valued at 0.9 times our estimated FY16 adjusted book value. The current macro headwinds have definitely taken a toll on the business performance of IDFC. Further, the company has also been treading a cautious path with no rush towards disbursements. Re-financing has been the major contributor to the business since past two quarters on account of lack of sufficient opportunities. That said, given the inherent balance sheet strength backed by sufficient capital adequacy and comfortable provision coverage with stable operational efficiency, IDFC serves as a good long term bet. Hence, we continue to maintain BUY recommendation on the stock on a longer-term horizon.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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