ICICI Securities: Buy IDFC

Infrastructure Development Finance Company Ltd (IDFC)

Company Background IDFC is a specialised financial intermediary with existing businesses in project finance, principal investments, asset management (for third party funds), investment banking, institutional broking and advisory services. The company has a strong management and has depicted a consistent performance with 19% CAGR in PAT during FY08-10. We expect advances to grow at 26% CAGR to | 39652 crore and PAT at 20% CAGR to | 1534.8 crore over FY10-12E. Consistently strong business growth and fee based income Advances growth at 39% YoY and 15% QoQ to | 28901 crore led to a sharp rise of 38% YoY and 6% QoQ in NII in Q1FY11. We expect NII to grow at 23% CAGR over FY10-12E due to assets growth. NIM has remained stable at 3.6% though we believe the same will come under slight pressure with rising rates. However, infrastructure status, on the other hand, should help guard against a sharp rise in cost of funds. Proportion of non-interest income has been hovering around 44-47% of total income. We believe with the loan book building up, this proportion will decline to 41% by FY12E. The AUM size stands at $6.9 billion generating hefty fee-based income protecting bottomline. Income from investment book also remains a 30% contributor to non interest income. Adequately capitalised with healthy return on assets The bank has consistently delivered RoA above 3% during the last five quarters. However, RoE is expected to be in the 15-16% range due to higher CAR of 19.6%. Leverage continues to be low at 5.3x as on Q1FY11 giving cushion for future growth. Superior asset quality Asset quality continues to remain upbeat at 0.15% NNPA and 0.27%. We expect delinquencies to remain low even for the next couple of years. Valuation We value IDFC’s standalone lending business at | 193 (2.4x FY12E ABV) and on SOTP basis arrive at a target of | 216 (includes AUM valuation, NSE stake). We expect IDFC to grow its balance sheet at 19% CAGR over FY10-12E with healthy return ratios. Asset quality continues to remain upbeat at 0.15% NNPA and 0.27% GNPA with margins expected to be stable around 3.5%.