IDFC-Growth on track : Kotak Sec

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IDFC (IDFC)

Banks/Financial Institutions

Growth on track. IDFC remains on track to meet its medium-term loan growth target
on the back of strong underlying demand for funds in the infrastructure space. In the
conference call with analysts, IDFC’s management discussed its balance sheet strategy
(originating and selling down loans) and plans to raise forex currency loans. We believe
that IDFC is well-positioned to capitalize on the underlying momentum and emerging
opportunities in the infrastructure space driving rich valuations. We retain ‘ADD’ rating
with price target of Rs220.


We are raising our loan growth estimates by 4-5% on the back of current strong traction. In the
earnings concall, IDFC’s management reiterated its growth plans – 3X loan growth in 3-4 years
implying loan CAGR of 35-45%. Current run-rate remains strong – 56% loan growth as of
September 2010; as such, growth will likely be somewhat front-ended.
IDFC proposes to sell down some of the loans originated during the quarter. Thus, annual growth
rate will likely be lower. The strategy of originating and selling down loans enables the company to
exploit episodic opportunities, increase loan ticket size and earn higher fees.
Power, telecom and road are the three key segments to drive growth for IDFC. Telecom sector
supported growth in 1QFY11 (on the back of 3G auctions). About 40% of the incremental
disbursements during the quarter were driven by the road sector.


NIM under pressure, some respite in near term
We expect IDFC’s spreads to remain under pressure in the medium term as interest rates in the
system rise. IDFC reduced its exposure to short-term borrowings, thereby pushing its borrowings
cost in 2QFY11. The time-lag in passing on the rise in bulk borrowings rates to its customers will
likely temper its spreads. We are accordingly modeling about 20 bps yoy decline in NIM in
FY2012E. However, we expect NIM to improve in the immediate term on the back of the
following:
􀁠 IDFC reported strong (19% qoq) loan growth in 2QFY11. However, growth was largely backended
and the benefit of higher average loan book will be visible from 3QFY11E.
􀁠 IDFC raised Rs35 bn (Rs26 bn of equity and Rs8 bn of compulsorily convertible preference
shares which have a dividend of 6%), the full impact will be visible only in 3QFY11E.
􀁠 Loan sell-down will cushion net interest income on balance sheet loans.



Increasing focus on forex loans
IDFC proposes to increase its forex borrowings over the next few quarters. As of September
2010, forex loans were about 7% of its overall borrowings. Post the ‘infra NBFC’
classification, IDFC can raise forex loans of US$500 mn annually under the automatic route.
We believe that higher exposure to forex loans will help IDFC to diversify its funding base.
IDFC hedges its forex exposure (for the interest as well as principal); as such borrowing cost
of such loans may not be considerably lower.

Revising estimates and target price
We are raising our estimates by 1-4% to factor higher loan growth and better margins in
the near term. Higher loan growth will also likely drive its provision cost as IDFC’s standard
asset provisions are linked to disbursements. We are revising up our price target to Rs220
from Rs205, retain ADD rating.

Key highlights of 2QFY11 results
􀁠 IDFC reported PAT of Rs3.4 bn, up 16% yoy and 4% above estimates.
􀁠 Strong loan growth (56% yoy and 19% qoq); approvals and disbursements were up over
200% yoy.
􀁠 Strong business growth has also driven IDFC’s core fee income (linked to the lending
business) – up 234% yoy.
􀁠 Investment banking business was in sweet spot; income from institutional equities
business was up 7% qoq in line with growth in cash market volumes.
􀁠 IDFC Mutual fund’s AUMs were down almost 12% qoq. Income from the AMC business
reported a sharper (39%) qoq decline.
􀁠 IDFC’s NPLs were stable during the quarter – gross NPL ratio was 0.23%.