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IDFC: Cost rationalization pays off - Views on News from Equitymaster
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IDFC: Cost rationalization pays off
Nov 9, 2011

IDFC declared its results for the second quarter of the financial year 2011-12 (2QFY12). The institution grew its interest income and profits by 41% and 55% YoY respectively. Here is our analysis of the results.

Performance summary
  • Consolidated income from operations grows 41% YoY in 1QFY12 and by 33% in 1HFY12, on the back of 14% YoY growth in advances. Disbursements fall by 62% YoY, approvals by 58% YoY in 1HFY12 on account of a slowdown in infrastructure activity.
  • Overall asset management revenues increased by 5% in 1HY12, total asset under management (AUM) stands at Rs 380 bn at the end of September 2011. While the public markets contributed to the growth, fees from the alternatives business faltered.
  • Net interest margins (NIM) increases to around 4% from 3.6% earlier.
  • Other income see an over 50% fall YoY in 2QFY12 and a 6% fall YoY in 1HFY12.
  • Bottomline grows by 55% YoY in 2QFY12 and by 24% in YoY 1HFY12 on the back of higher net interest income and a control in operating expenses.
  • Capital adequacy ratio stands at a robust 22.9% at the end of 1HFY12 (Tier-1 ratio of 20.5%).

Consolidated numbers…
Rs (m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Income from operations 12,168 17,149 40.9% 23,081 30,663 32.8%
Interest expended 5,688 8,260 45.2% 10,540 15,799 49.9%
Net Interest Income  6,480 8,890 37.2% 12,541 14,864 18.5%
Net interest margin       3.6% 4.0%  
Other Income 24 11 -53.5% 82 77 -5.8%
Operating expense 1,239 1,314 6.1% 2,470 2,445 -1.0%
Provisions and contingencies 515 631 22.6% 960 1,031 7.3%
Profit before tax 4,750 6,956 46.4% 9,193 11,466 24.7%
Tax 1,375 1,715 24.7% 2,473 3,092 25.1%
Effective tax rate 28.9% 24.6%   26.9% 27.0%  
Minority int/assoc 9 2   15 6  
Profit after tax/ (loss) 3,384 5,243 54.9% 6,735 8,380 24.4%
Net profit margin (%) 27.8% 30.6%   29.2% 27.3%  
No. of shares (m)         1,461  
Book value per share (Rs)*         82.6  
P/BV (x)         1.5  
*On a trailing 12-month basis

What has driven performance in 1HFY12?
  • IDFC saw its disbursements and approvals fall by 58% and 62% YoY respectively in 1HFY12. The current economic environment as well as a slowdown in infrastructure activity, especially in the power sector contributed to this decline. However, the loan book grew by 14% YoY. The company has been seeing some uptick on the road projects and telecom front, however there is virtually no traction on the power sector side. The institution was able to improve its NIMs to around 4% from 3.6% on the back of higher yields. IDFC increased borrowings by 12% YoY in 1HFY12 mainly through the long term funding route and through overseas borrowings at favorable rates. Its forex loans are 100% hedged, thus it may not lose much on account of the rupee volatility.

  • The RBI's 13 interest rate hikes over the past year and a half has led to a substantial slowdown in economic activity. Slower GDP growth in the country and inaction on the infrastructure front are expected to lead to muted loan growth for the company in FY12 versus the 50% growth in advances seen in FY11. The management however reiterates its assumption of a 15-20% loan growth. We have been relatively more conservative in our estimates. Policy issues, environmental clearance delays, and coal linkage unavailability has impacted the performance of the power sector. IDFC's exposure to the power sector loans was around 43% at the end of 1HFY12, followed by transport at 28%, and telecom at 19%. As regards to its power exposure, IDFC has significant exposure to renewable energy projects and captive power projects. Approximately half of its exposure is into operational assets. Thus mainly the assets for projects still under construction are at risk.

    Significant slowdown in growth
    (Rs m) 1HFY11 1HFY12 Change
    Sanctions 329,690 139,010 -57.8%
    Disbursements 173,740 65,980 -62.0%
    D/S ratio 52.7% 47.5%  
    Advances 343,973 393,134 14.3%

  • Overall asset management revenues saw a 5% increase YoY in 1HFY12, on account of a fall in income from the alternative investments desk. However its mutual fund business performed well, growing by 44% YoY. Investment banking and institutional broking income decreased by 67% YoY in 1HFY12. This was more in line with the general sentiment in the capital markets. The company is planning to monetize some capital gains from its investments in FY12, in order to improve profitability in light of a balance sheet slowdown. Income from principal investments saw a 70% YoY increase in 1HFY12. Loan related fees however saw a 48% decrease in 1HFY12 on account of slowing balance sheet growth this year.

    Funds under management 1HFY12
    Funds US$ m Rs m
    IDFC Private Equity 1,000 44,450
    Fund I 100 2,730
    Fund II 300 12,690
    Fund III 600 29,030
    IDFC Project Equity 900 38,370
    IDFC AMC 6,100 297,310
    Total 8,000 380,130

  • The institution is currently adequately capitalised with CAR (capital adequacy) of 22.9% in 1HFY12 versus a regulatory requirement of 15% CAR of as per its status as an Infrastructure Financing Company (IFC). The operating costs for the institution have decreased to 16% YoY, versus a cost to income ratio of 20% in 1HFY11. It has concentrated on improving its efficiency in operations, and this helped contribute to a healthy growth in net profits.
  • IDFC maintained its strong asset quality with 0.1% net NPA levels at the end of 1HFY12. However, the power sector is under serious pressure on both the generation side, (due to lack of coal availability) and the distribution side (due to the sorry financial state of various state electricity boards. In 1HFY12, it did not see any of its accounts restructured. However the next 18 months maybe challenging on this front. But compared to the size of its balance sheet the actual quantum of restructuring maybe small, amounting to 2-3% of loan book. These accounts are being actively monitored to see whether they are showing any signs of stress.

What to expect?
At the current price of Rs 125.8, the stock is valued at 1.4 times our estimated FY14 adjusted book value. The company is expected to witness a slowdown in balance sheet growth in FY12, compared to the previous year on account of lower credit offtake in the infra space. Approvals and disbursements have taken a hit in 1HFY12. These were well anticipated given the policy inaction, environmental clearances and coal linkage issues that continue to dog the power sector. However, the company is going to try and focus on growth in the renewable energy space, and in road projects in order to fund its balance sheet growth.

But, there is also a brighter side to it. Less than 30% of IDFC's funding currently comes from banks, which have all hiked their base rates substantially. The institution is able to access other cheaper sources of funding, and thus able to give its customers a better lending rate versus some banks. Most banks have also reached their ceilings on exposure to the infrastructure space. Thus, once the economy bounces back, IDFC is expected to be a key beneficiary. The institution has also been able to maintain its asset quality, and is not expected to see significant pressure on the same going forward. IDFC has one of the highest capital adequacy ratios, and has high operating efficiency, which it keeps trying to improve. We thus reiterate our positive view on IDFC 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 margin of safety in valuations of steady long term players like IDFC.

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