UBS: Infrastructure Development Finance- Low ROE could cap upside

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


UBS Investment Research
Infrastructure Development Finance 
Low ROE could cap upside 
„ Strong growth potential but spreads could correct from cyclical highs
Due to the strong pipeline and latent demand from the private sector, we forecast a
30% loan CAGR for IDFC for FY11-13. However, we expect spreads (2.4% as on
September 2010) to decline to 2-2.2%, affecting the NIM, and hence we expect
ROA to decline from 3.1% in FY11 to 2.8% in FY12. Diversification of the
funding base to retail bonds and ECBs should help improve spreads over the
medium term (18-24 months) as their proportion becomes meaningful.

„ We forecast near-term ROE of 15-16%
Hence, despite strong growth (and improved leverage), we expect the lending
business ROE to remain flat YoY in FY12. The subsidiary could boost
consolidated revenue but a significant amount is capital market-linked, the outlook
for which is uncertain. While the contribution of treasury income has declined, it
still forms 15% of net revenue.  
„ Stake sell-down in asset management to Natixis is positive
We think the recent deal with Natixis Asset Management is positive, as: 1) it
revalue’s the mutual fund business to Rs12bn (against the Rs8bn which IDFC had
paid to acquire the business) and at 6% of AUM; 2) it will give IDFC’s asset
management access to international investors and help augment profits.
„ Valuation: maintain Neutral
Our sum-of-the-parts based price target is Rs180. We think IDFC remains one of
the better exposures to the infrastructure theme; however, we think low near-term
ROE will cap upside potential from here.