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IDFC
F2Q11: Strong Loan Growth
Quick Comment – IDFC reported F2Q11 earnings of
Rs3.4bn vs. our expectation of Rs3.7bn. However, the
miss was in capital gains (which are volatile). Underlying
earnings (excluding capital gains) were about 20%
ahead of our expectations. The big swing was driven by
a spike in loan-related fees.
Loan book grew 20% QoQ: This drove core revenue
(ex capital gains) by 38% YoY and 29% QoQ. When we
look at per share numbers (to account for equity
issuance last quarter), growth was still strong at 22%
YoY and 15% QoQ.
NII was tepid, compensated for by fees: While loan
growth was 20% QoQ, reported infra NII grew 18% QoQ.
If we adjust for equity issuance, which lifts NII (given
zero funding cost), infra NII growth was 2%. This shows
that NIMs were under pressure. With rates having
remained high and IDFC coming off extremely high NIM
reported in the last few quarters, we expect NII growth to
trail loan growth by a significant amount.
Loan-related fees were very strong at Rs1.07bn (up
143% QoQ and 182% YoY). This tends to be a very
volatile number on a quarterly basis, but even if we
assume that the normalized number is lower than that
recorded in F2Q, fees income generation has clearly
picked up.
Costs were controlled very well: IDFC reported 12%
YoY and flat sequential growth in operating expenses,
resulting in significant improvement in efficiency. This
drove core pre-provision earnings growth at 45% YoY
(on a per share basis, it was 29%). Provisions were up,
driven by loan growth (need for general provisioning).
Maintain EW: We believe IDFC is well placed to benefit
from the pick-up in infra spending in India. However,
EPS growth will likely continue to trail volume growth
given regulatory norms on single-party lending, etc.
Moreover, at 17.8x F2012e earnings (adjusted for NSE),
the stock is not cheap. We like the story but would buy if
stock corrects or digests valuations for some time.
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