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IDFC
PRICE: RS.175
RECOMMENDATION: BUY
TARGET PRICE: RS.210
FY12E P/EX:15.6;
P/ABVX:2.1X
q IDFC sells 25% stake in AMC to Natixis Global for a consideration of Rs
3bn (6% of AUM); valuing the business at Rs 12bn.
q Strong growth in infrastructure development to continue, we maintain
our positive outlook for IDFC; infrastructure loan book to grow by 30%
CAGR over FY10-12.
q Earnings growth to remain strong; IFC status will help maintain stable
NIM going forward at 3.6%
q Healthy growth in fee income following improved economic activity and
uptick in capital market volumes
q Post the recent correction in the stock price, we are upgrading our stock
recommendation to BUY from ACCUMULATE earlier with a price target of
Rs.210. Our price target offers 20% upside from current levels.
IDFC sells 25% stake in AMC to Natixis Global for a consideration
of Rs 3bn (6% of AUM); valuing the business at Rs 12bn.
IDFC has sold a minority stake in the asset management business amounting to
25% to Natixis Global. This is more in the nature of a strategic partnership with
Natixis in order to give access to international distribution and investors. The deal is
for a consideration of Rs 3bn which translates to about 6% of assets under management (AUM) as on September 30 valuing the business at Rs. 12bn. The deal will
give IDFC access to international distribution and investors
Strong growth in infrastructure development to continue, we
maintain our positive outlook for IDFC; infrastructure loan book
to grow by 30% CAGR over FY10-12.
Given the strong investment in infrastructure development in India over the eleventh
and twelfth five year plan as the Government is targeting a higher Gross capital formation to GDP ratio; we opine that domestic infrastructure financiers like IDFC will
remain in a sweet spot going forward.
We opine that the growth in the infrastructure financing business will continue to
remain strong following higher thrust on development of power, roads, ports and
also telecom sector which forms significant part of IDFC's loan book. With government focusing more on large scale projects (like UMPPs and Mega Highway
Projects) infrastructure financing business will continue to see strong traction, we expect a CAGR of 30% over FY10-12 to Rs. 423bn. Additionally, the Infrastructure Finance Company (IFC) status, IDFC holds superior pricing power - we opine that this
support NIM going forward.
Earnings growth to remain strong; IFC status will help maintain
stable NIM going forward at 3.6%
Given the strong growth in infrastructure financing business coupled with healthy
growth in fee income, IDFC earnings growth outlook appears bright. Going forward,
expected increase in equity leverage to 7x from 5x coupled with a steady RoA of
2.75%, will aid improvement in RoE to around 19%.
Although during H1FY11 IDFC's NIM remained stable at 3.6% (overall), we opine
that Infrastructure financing company (NBFC-IFC) status, we opine that IDFC will be
able to maintain healthy NIM going forward. However, rising interest rates may
pressurise its NIM.
We have marginally tweaked our estimates following a positive earnings growth outlook. We expect IDFC's net profit growth of 27% yoy for FY11 to Rs 13.5bn and
25% yoy to Rs.16.8bn in FY12. We expect an EPS of Rs.9 and Rs.11.2 for FY11 and
FY12 respectively.
Healthy growth in fee income following improved economic activity and uptick in capital market volumes
IDFC's fee income during H1FY11 witnessed a healthy growth of 20% yoy to
Rs.5.3bn. This is largely attributed to capital gains on certain infrastructure investments in principal investment business in Q1FY11. Improved capital market volumes
and increased primary capital market activity has aided growth in the investment
banking business. Additionally uptick in the economic activity aided improved infrastructure loan related fee. IDFC's AUM during H1FY11 remained flat, which led to a
flattish asset management fee during H1FY11. Going forward, we opine that steady
capital market volumes will aid investment banking business growth and fund mobilization in its asset management business.
Background
The Infrastructure Development Finance Company Limited (IDFC) is India's leading
integrated infrastructure finance player providing end to end infrastructure financing
and project implementation services. The substantial investment requirement of the
infrastructure development in India and rapid economic growth are the key growth
drivers for IDFC. IDFC has also been working closely with government entities and
regulators in formulating policies and framework for public private partnership.
Valuation and Recommendation
IDFC is our preferred pick in the infrastructure financing space and we continue to
maintain our positive outlook for the stock. We marginally tweak our estimates and
expect infrastructure loan growth of 30% yoy to Rs.325bn in FY11 and 30% yoy to
Rs. 423bn in FY12. Net profit is expected to grow by 27% yoy to Rs.13.5 bn in FY11
and 25% yoy to Rs.16.8bn in FY12.
Our sum-of the-parts factor in Rs.13.5 per share for IDFC Mutual Fund (the deal valuations are in line with our estimates), while the core business is valued at 2x. At the
current market price the stock is trading at FY12E P/E of 15.6x and P/ABVx of 2.1x.
Post the recent correction in the stock price; we are upgrading our stock recommendation to BUY from Accumulate earlier with a price target of Rs.210 (maintained).
Our price target offers 20% upside from current levels.
Risks and concerns
n Tightening of liquidity in the system may harden interest rates and resultantly
impact its NIM. However, we opine that IDFC's IFC status will help contain cost
of funds leading to stable NIM.
n Moderation in infrastructure capex cycle and delay in project commissioning in
the backdrop of delay in land acquisition and environment issues may impact the
business growth
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