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IDFC (IDFC)
Banks/Financial Institutions
Moderating growth traction, retain positive view. We believe that IDFC’s loan
growth will likely moderate in the near term though management remains confident on
achieving its medium-term growth target. Income from non-lending avenues is primarily
linked to capital markets and will likely remain under pressure if disbursements slow
down or equity markets remain weak. Recent correction in the stock price is steep and
more than offsets the impact of lower near-term traction. Retain ADD.
Medium-term growth potential remains strong
In the earnings concall, IDFC’s management highlighted that they were confident of
achieving their medium-term growth targets—3X loan growth in 3-4 years implying loan
CAGR of 35-45%. With strong growth in 1HFY11 (15% qoq in 1QFY11 and 18% qoq in
2QFY11), IDFC is well-placed to achieve 48% loan growth in 2011E. Notably, the loan
book was almost flat qoq in 3QFY11 and we expect growth to moderate from the high
levels of 1HFY11. We remain positive on the medium-to-long-term growth prospects of
IDFC though rising interest rates pose a risk to NIM and overall growth in the
infrastructure sector in the near term. Accordingly, we are modeling 37% and 33% loan
growth down from 43% and 41% for FY2012E and FY2013E, respectively. We have
modeled 40 bps yoy decline in spreads in our projections in FY2012E (no change). The
impact on NIMs is relatively lower (down 10 bps yoy) due to the recent capital issuance by
the company.
IDFC continues to focus on roads, power and telecom sectors
IDFC’s management believes that rising losses of state utilities pose a risk though they do not
expect any defaults/losses for lenders. IDFC has anyway been selective in lending.
According to the management, strong competition in telecom poses a risk but the overall
opportunity remains big and they expect strong players to benefit over the longer term.
The slow pace of progress in the roads sector remains a risk.
IDFC management expects its top-20 groups to drive 60-70% of its growth; during the quarter
top-20 client groups of IDFC have likely driven most of the business.
Capital market-related income under pressure
IDFC’s non-lending income is largely driven from capital gains, loan-related fees, asset
management fees, investment banking and broking actives. Lower traction of disbursements
will likely temper the lending related and investment banking fees. A subdued equity market
poses a risk to broking income and capital gains booked by the company.
Cost-to-income ratio has been volatile
In 3QFY11, IDFC’s operating expenses increased to Rs2 bn, up 43% yoy. Consequently,
cost-to-income ratio increased to 31% from 25% reported in 1HFY11. Notably, IDFC’s costto-
income ratio was 19-27% in 9MFY10 but increased to 47% in 4QFY10. Management
has highlighted that expense provisions will be smoothened and not as lumpy as FY2010. In
the conference call, IDFC guided for cost-to-income ratio of 24% for FY2011E as compared
to 26% in FY2010.
Retain positive stance
We are reducing our estimates for IDFC by about 5% for FY2011E to FY2013E. We are
modeling 37% and 33% loan growth down from 43% and 41% for FY2012E and
FY2013E, respectively. A sharp decline in capital gains has pulled down FY2011E earnings
and higher provisions for standard assets. IDFC has highlighted that their current
provisioning policy is somewhat conservative and the management will likely review the
same over time, we are modeling lower provisioning level from FY2012E.
We are reducing our price target for IDFC to Rs175 from Rs210 in order to factor lower
value of core business and equity market-linked businesses. We value the core business at
2X PBR FY2012E for 17-18% core RoE.
We are valuing IDFC SSKI at 12X PER FY2012E (18X FY2012E earlier), assume lower
unrealized gains on equity investment book and factor lower AUM for IDFC Mutual Fund
(we are modeling 20% yoy growth in AUM).
We continue to retain ADD rating on IDFC and believe that IDFC remains one of the best
plays on infrastructure finance and is well-placed to capitalize opportunities in the space.
However, near-term performance will likely be muted due to lower growth traction.
Key highlights of our note on 3QFY11 results
IDFC reported PAT of Rs3.2 bn, up 19% yoy and 6% below estimates; core earnings 2%
above estimates.
IDFC reported NIM (as per KS estimates) of 4.3% in 3QFY11 versus 3.9% in 2QFY11.
IDFC’s loan book was stable qoq. Notably, the company reported 15% qoq and 19% qoq
loan growth in 1QFY11 and 2QFY11; despite stable qoq growth in 3QFY11 loan book is
up 49% yoy.
Disbursements were up 64% yoy (down 55% qoq); approvals were down 44%yoy.
IDFC’s NPLs were stable during the quarter—gross NPL ratio was 0.22%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IDFC (IDFC)
Banks/Financial Institutions
Moderating growth traction, retain positive view. We believe that IDFC’s loan
growth will likely moderate in the near term though management remains confident on
achieving its medium-term growth target. Income from non-lending avenues is primarily
linked to capital markets and will likely remain under pressure if disbursements slow
down or equity markets remain weak. Recent correction in the stock price is steep and
more than offsets the impact of lower near-term traction. Retain ADD.
Medium-term growth potential remains strong
In the earnings concall, IDFC’s management highlighted that they were confident of
achieving their medium-term growth targets—3X loan growth in 3-4 years implying loan
CAGR of 35-45%. With strong growth in 1HFY11 (15% qoq in 1QFY11 and 18% qoq in
2QFY11), IDFC is well-placed to achieve 48% loan growth in 2011E. Notably, the loan
book was almost flat qoq in 3QFY11 and we expect growth to moderate from the high
levels of 1HFY11. We remain positive on the medium-to-long-term growth prospects of
IDFC though rising interest rates pose a risk to NIM and overall growth in the
infrastructure sector in the near term. Accordingly, we are modeling 37% and 33% loan
growth down from 43% and 41% for FY2012E and FY2013E, respectively. We have
modeled 40 bps yoy decline in spreads in our projections in FY2012E (no change). The
impact on NIMs is relatively lower (down 10 bps yoy) due to the recent capital issuance by
the company.
IDFC continues to focus on roads, power and telecom sectors
IDFC’s management believes that rising losses of state utilities pose a risk though they do not
expect any defaults/losses for lenders. IDFC has anyway been selective in lending.
According to the management, strong competition in telecom poses a risk but the overall
opportunity remains big and they expect strong players to benefit over the longer term.
The slow pace of progress in the roads sector remains a risk.
IDFC management expects its top-20 groups to drive 60-70% of its growth; during the quarter
top-20 client groups of IDFC have likely driven most of the business.
Capital market-related income under pressure
IDFC’s non-lending income is largely driven from capital gains, loan-related fees, asset
management fees, investment banking and broking actives. Lower traction of disbursements
will likely temper the lending related and investment banking fees. A subdued equity market
poses a risk to broking income and capital gains booked by the company.
Cost-to-income ratio has been volatile
In 3QFY11, IDFC’s operating expenses increased to Rs2 bn, up 43% yoy. Consequently,
cost-to-income ratio increased to 31% from 25% reported in 1HFY11. Notably, IDFC’s costto-
income ratio was 19-27% in 9MFY10 but increased to 47% in 4QFY10. Management
has highlighted that expense provisions will be smoothened and not as lumpy as FY2010. In
the conference call, IDFC guided for cost-to-income ratio of 24% for FY2011E as compared
to 26% in FY2010.
Retain positive stance
We are reducing our estimates for IDFC by about 5% for FY2011E to FY2013E. We are
modeling 37% and 33% loan growth down from 43% and 41% for FY2012E and
FY2013E, respectively. A sharp decline in capital gains has pulled down FY2011E earnings
and higher provisions for standard assets. IDFC has highlighted that their current
provisioning policy is somewhat conservative and the management will likely review the
same over time, we are modeling lower provisioning level from FY2012E.
We are reducing our price target for IDFC to Rs175 from Rs210 in order to factor lower
value of core business and equity market-linked businesses. We value the core business at
2X PBR FY2012E for 17-18% core RoE.
We are valuing IDFC SSKI at 12X PER FY2012E (18X FY2012E earlier), assume lower
unrealized gains on equity investment book and factor lower AUM for IDFC Mutual Fund
(we are modeling 20% yoy growth in AUM).
We continue to retain ADD rating on IDFC and believe that IDFC remains one of the best
plays on infrastructure finance and is well-placed to capitalize opportunities in the space.
However, near-term performance will likely be muted due to lower growth traction.
Key highlights of our note on 3QFY11 results
IDFC reported PAT of Rs3.2 bn, up 19% yoy and 6% below estimates; core earnings 2%
above estimates.
IDFC reported NIM (as per KS estimates) of 4.3% in 3QFY11 versus 3.9% in 2QFY11.
IDFC’s loan book was stable qoq. Notably, the company reported 15% qoq and 19% qoq
loan growth in 1QFY11 and 2QFY11; despite stable qoq growth in 3QFY11 loan book is
up 49% yoy.
Disbursements were up 64% yoy (down 55% qoq); approvals were down 44%yoy.
IDFC’s NPLs were stable during the quarter—gross NPL ratio was 0.22%.
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