IDFC: Loan growth remains strong, though spread under pressure: Daiwa

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IDFC: Loan growth remains strong, though spread under pressure


Strong core performance in 2Q FY11
􀂃 Infrastructure Development Finance (IDFC) recorded strong netinterest
income growth of 35% YoY for 2Q FY11; however, a
rise in standard asset provisioning, up 104% YoY, led to netprofit
growth of just 17% YoY. Loan growth was strong at 56%
YoY and 19% QoQ for the quarter, and the interest spread stood
at 2.4%, down 30bps QoQ.


Equity-raising helps lending to large infra projects
􀂃 The recent equity dilution of Rs35bn (US$770m) is helping
IDFC to participate in lending to large infrastructure projects. It
also helped to neutralise the negative impact of NIM
compression to some extent in 2Q FY11. We forecast ROE for
the core lending business of around 16% for FY11-12, rising to
almost 18% by FY13.

Target price raised to Rs215; maintain Buy
􀂃 We forecast earnings from the company’s core financing
business to rise at a CAGR of 28% for FY11-13. We have
revised up our FY11 and FY12 earnings forecasts by 12% and
21%, respectively, to account for an acceleration in loan growth.
We have also raised our six-month target price by 18.8% to
Rs215 by now assigning Rs166/share to the core lending
business (from Rs134/share previously) and Rs49/share to the
value of IDFC’s equity investments (from Rs47/share
previously). We maintain our 1 (Buy) rating on the stock.


Other highlights of the 2Q FY11 results
• Strong net-interest income growth of 35% YoY and 11% QoQ was driven by an
acceleration of loan growth to 56% YoY and 19% QoQ.
• Loan related and other fees were strong at Rs1.07bn, up 234% YoY and 143%
QoQ, in line with robust disbursement growth of 232% YoY and 80% QoQ.
• Low income booked in principal investments led to almost flat quarter-onquarter
other income for the quarter; however income from investment banking
and broking was strong at Rs740m, up 106% QoQ.
• Management expects to increase its overseas borrowing in the next one-to-two
years through the external commercial borrowing route. Foreign-currency loans
stood at 6% of total borrowing for 2Q FY11.
• Management forecasts a cost-to-income ratio of around 22-25% for the next
three-to-four years.


Revising up earnings forecasts for FY11 and FY12
We have revised up our FY11 and FY12 earnings forecasts by 12.3% and 21.4%,
respectively, as we now forecast an acceleration in loan growth to 40% YoY for
FY11 (from 24% YoY previously) and 38% YoY for FY12 (from 25% YoY
previously), which would keep core earnings strong. We forecast earnings from the
core financing business to rise at a CAGR of 28% for FY11-13.


Target price raised to Rs215; maintain Buy rating
We value the stock on a sum-of-the-parts (SOTP) basis. As around 30% of IDFC’s
net worth is invested in equity, we value the lending and investment businesses
separately. We now assign Rs166/share to the core lending business (from
Rs134/share previously) and Rs49/share to the value of IDFC’s equity investments
(from Rs47/share previously). We have raised our six-month target price by 18.8% to
Rs215 and maintain our 1 (Buy) rating. We see a higher-than-expected compression
in the interest spread as a key risk to our earnings forecasts and target price.