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IDFC: Capital buffer for growth - Views on News from Equitymaster
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IDFC: Capital buffer for growth
Nov 9, 2010

IDFC declared its 2QFY11 results. The institution grew its interest income and profits by 19% and 16% YoY respectively. Here is our analysis of the results.

Performance summary
  • Consolidated income from operations grows 15% YoY in 1HFY11, on the back of 58% YoY growth in advances. Disbursements grow by 254% YoY, approvals by 231% YoY in 1HFY11 versus 1HFY101.
  • Net interest margins (NIM) remain stable at 3.5% as in 1HFY10.
  • Other income sees a fall of over 50% YoY in 1HFY11, and an over 80% fall YoY in the 2QFY11 due to lower treasury gains.
  • Bottomline grows by 19% YoY in 1HFY11 and by 16% in YoY 2QFY11.
  • Capital adequacy ratio stands at 24.7% at the end of 1HFY11, compared to 21.7% at the end of the previous quarter last year.

Consolidated numbers...
Rs (m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Income from operations      10,198     12,168 19.3%   20,121   23,081 14.7%
Interest expended  5,121 5,688 11.1%   10,388   10,540 1.5%
Net Interest Income   5,078 6,480 27.6% 9,733   12,541 28.9%
Net interest margin       3.5% 3.5%  
Other Income 145   24 -83.6%     168       82 -51.1%
Operating expense  1,097 1,239 12.9% 2,123 2,470 16.4%
Provisions and contingencies 242    515 112.7%     177     960 444.1%
Profit before tax  3,884 4,750 22.3% 7,602 9,193 20.9%
Tax 975 1,375 40.9% 1,949 2,473 26.9%
Effective tax rate 25.1% 28.9%   25.6% 26.9%  
Profit after tax/ (loss)  2,908 3,375 16.0% 5,653 6,720 18.9%
Net profit margin (%) 28.5% 27.7%   28.1% 29.1%  
No. of shares (m)       1,295 1,460  
Book value per share (Rs)*            76.1  
P/BV (x)              2.7  
* (Book value as on 30th September 2010)

What has driven performance in 1HFY11?
  • Due to a robust pick-up in demand for funding for infrastructure development and banks' reluctance to fund long term assets with their short term liabilities, IDFC saw its sanctions grow by 231% YoY. The growth in disbursements and loan book was a robust 254% and 58% YoY respectively. Flat growth in interest expense helped IDFC keep its NIMs constant at 3.5%. The company increased borrowings by 40% YoY in 1HFY11 mainly through the long term funding route.

    Dynamic growth...
    (Rs m) 1HFY10 1HFY11 Change
    Sanctions      99,030   327,650 230.9%
    Disbursements      49,070   173,690 254.0%
    D/S ratio 49.6% 53.0%  
    Advances   217,850   343,973 57.9%

  • The share of non-interest income to IDFC’s total income increased to 23% in 1HFY11 from 22% in the previous half last year. Investment banking and broking saw a 12% increase, along with buoyancy in the capital markets. Fee income (on loans and others) increased by 102%. However growth in asset management fees and income from principal investments was flat.

    Funds under management 1HFY11
    Funds US$ m Rs m
    IDFC Private Equity         1,330         59,920
    Fund I             200           8,440
    Fund II             400         19,880
    Fund III             700         31,600
    IDFC Project Equity             900         38,370
    IDFC AMC         4,400      199,480
    Total         6,630      297,770

  • The institution is currently more than adequately capitalised with CAR (capital adequacy ratio) of 24.7% in 1HFY11. It needs to maintain minimum CAR of only 15% by March 2011 as per the RBI norms, as well as its new IFC status. The company recently completed a round of equity raising, with Rs 26.5 bn raised from its QIP and Rs 8.4 bn raised from preferential issue of compulsorily convertible cumulative preference shares (CCCPS). The strong capital base, will help keep a good capital buffer for further balance sheet growth.

  • The operating costs for the institution have also increased by 16% YoY in 1HFY11. However it improved operating efficiency with a cost to income ratio of 19.6%, compared to 21.4% in 1HFY10. IDFC maintained strong asset quality with 0.1% net NPA levels at the end of 1HFY11.

What to expect?
At the current price of Rs 207.4, the stock is valued at 2.3 times our estimated FY13 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 IDFC with a long-term perspective. (Research Pro subscribers can view our latest update on the company here.) The company is well positioned for growth with its status as a specialised infrastructure financing company and with its augmented capital base. The first tranche of the company’s Rs 34 bn tax-free bond issue failed to whet investor appetite. However, IDFC has the option to raise this money till March 2011.

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