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• IDFC’s 2Q11 PAT was 3% below our estimate at Rs3.4B, (consensus:
Rs3.3B). The underlying business grew strongly, with loan growth at
19% q/q. This drove strong revenue growth, although margins were
under slight pressure and non-interest income continues to lag.
• Positives - strong loan-related revenue momentum: a) Loan growth
was high at 56%y/y, with energy, transportation and (to a lesser extent)
telecom driving the growth. b) The book is also building up well, with
undisbursed sanctions growing by 26% q/q. c) Loan-related fees grew
234%, partially led by the strong growth in sanctions and disbursements.
• Negatives – weak margins, IB: The rolling 12-month spread was down
sharply from 2.7% to 2.4% in 3 months (no quarterly disclosure). IB and
AMC fees were also anemic; the outlook for IB is improving.
Investment profits were down 90% q/q, driving the tax rate up from 24%
to 28%.
• Retain UW: IDFC had 16% profit growth on 45% asset growth. This
ROA pressure is structural as it shifts from fees to spreads. The latter has
the advantage of greater income stability, but is also low-ROE. We think
the current valuation of 20x one-year fwd P/E is too rich, and we
maintain our UW rating
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