IDFC: Strong growth traction– Edelweiss

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In Q2FY11, IDFC reported PAT of INR 3.4 bn, a growth of 18.6% Y-o-Y (marginally
lower than our expectation of INR 3.5 bn), driven by steady core income
performance. This quarter’s key highlight was the continued momentum in approvals
and disbursements (up 2.6x and 2.3x Y-o-Y, respectively, led by strong traction in
private power projects and disbursement to the transportation sector. Fee income
came in strong (up 43% Y-o-Y), led by improved activity in the investment banking
business and robust loan origination fees. For the quarter, net interest income grew
35% Y-o-Y and 11% Q-o-Q, to INR 3.74 bn. Calculated margins came in at a healthy
3.52%, down 18bps Q-o-Q, led by lower treasury income; asset quality performance
did not deteriorate. Having raised fresh capital of INR 34.9 bn, we believe IDFC is on
course to triple its balance sheet over the next 3-4 years.


􀂄 Strong uptick in business: Capital in; now time to leverage
Traction in loan book is clearly reflected in the impressive 19% Q-o-Q growth, to
INR 344 bn, well in sight of the targeted 35%-40% growth for the year.
Sequentially, project and corporate loans led growth at 30% and 15%,
respectively, while loans against shares declined significantly by 50%.
Outstanding loan exposure in the top three sectors (energy, transportation, and
telecommunications/IT) rose 19%, 65%, and 7%, Q-o-Q, respectively.

􀂄 Calculated margins dip ~20bps
During the quarter, IDFC’s margins dipped ~20bps (though still healthy) due to
lower lending yields and drop in NII from treasury which offset the benefit
arising from the higher capital floats of INR 35 bn. Total borrowings increased
13% Q-o-Q, with significant increase of 16% in bonds/debentures (~62% of
total borrowings) suggesting preference for market borrowing against rupee
loans from banks. On the duration front, asset duration remained flat at ~2.11
years, whereas liabilities increased from 2.19 years to 2.36 years, reflecting the
long-term gestation period of power projects.

􀂄 Outlook and valuations: Near-term RoEs under pressure; maintain ‘HOLD’
Led by fresh capital infusion and robust outlook on infrastructure, we are
building in loan growth of 37% CAGR over FY10-12. Led by strong loan growth
and steady fee income, we are building in EPS CAGR of 16% over FY10-12.
However, ROE will remain subdued at ~14% due to front-ended capital raising.
Our SOTP fair value for the stock stands at INR 210/share, valuing the core
business at ~2.3x book. Hence, we maintain ‘HOLD’ recommendation on the
stock and rate it ‘Sector Performer’ on relative return basis.