IDFC: Below expectations: Lower NII, capital gains; Sell: Goldman Sachs

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EARNINGS REVIEW
Infrastructure Development Finance Co.
Sell
Below expectations: Lower NII, capital gains; maintain Sell
PAT 9% below our estimate on lower income, higher provisions
IDFC reported net profit of Rs3.7 bn (16% yoy growth), 9% below GS and
Bloomberg consensus estimates on lower NII and capital gains. Key
highlights: (1) Net fund-based income grew 15% yoy, 24% below GSe despite
equity issuance as: (a) IDFC’s 12-m rolling spread declined 30 bp qoq, a
concern for wholesale borrowers in a rising rate environment, (b) booked
only Rs120 mn gains vs Rs1.2 bn in 1Q, and (c) loan growth was strong at
56% yoy, but was likely back-ended and some of the high yielding loans were
pre-paid.


Disbursement growth was more than double our estimate and the
company may exceed our loan growth projections, which we revise up (by
14.7%/18.5% to 61%/49% for FY11E and FY12E). (2) Fee income was strong,
up 55% yoy (69% above our estimate) driven by higher disbursements,
advisory, debt syndication, and brokerage business. (3) Provisions increased
113% yoy (62% ahead), on the back of higher disbursements. (4) Raised Rs5
bn through retail bond issuance (1.9% of liability). Further, IDFC has stated
that it plans to issue more retail bonds as well as tap external commercial
market for US$500 mn every year (foreign loans are 7% of total outstanding
borrowings of Rs360 bn) to diversify its borrowing profile.


Sell: Valuations full vs RoE, concerns for wholesale borrowers
We lower our EPS by 3% for FY11E reflecting lower 2Q numbers, but raise
FY12E/FY13E EPS by 1%/4% to reflect higher loan growth. We raise our 12-m
SOTP-based TP to Rs185 (Rs180 earlier) as we roll-forward BVPS by one
quarter to September 2011. We note that our implied valuation would be
Rs195 if we were to base it on our March 2012E BVPS. We maintain Sell
given valuation of 3X FY11E P/B (standalone entity) vs average RoE of 15%
over FY11E-FY13E. Risks: Improvement in liquidity, lower borrowing costs.