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IDFC
Decent nos. but headwinds remain
Event
Nos. in line with consensus; reduce TP to Rs160 and maintain Neutral:
IDFC reported a 19% YoY increase in 3QFY11 net profit to Rs3.2bn, in line
with consensus. We maintain Neutral but reduce our TP by 20% to Rs160 on
account of a lower valuation for the financing as well as AMC business.
Impact
Spreads maintained at 2.4%: On a 12m rolling basis, spreads have been
maintained at 2.4% QoQ; however, they are down 20bp YoY. We expect
pressure on spreads to remain considering the sharp rise in cost of funds.
IDFC also has a relatively large dependence on short term funding at 15% of
overall borrowings compared to its other infrastructure financing peers.
AMC fees down, AUM reporting structure is now based on outstanding
AUM: AMC fees are down 7% YoY and 16% QoQ. Private equity AUM is
down 25% YoY and QoQ; however, this is mainly due to a change in the
reporting structure. IDFC has started reporting FUM on an outstanding basis
compared to the earlier method of reporting on a committed basis. The PE
fund-I has already seen 6 exits out of 11 investments and as and when exits
occur, fees should reduce but capital gains and carry would be high. This is
unlikely to be the case in PE fund-II where initially there will be no gains
booked as the initial round of exits would confine to returning principal and
hurdle to the investor. The domestic AMC business continues to be under
pressure with AUMs down 28% YoY and 6% QoQ.
Key negatives: Approvals are down sharply for 3Q, higher opex: Gross
approvals are down sharply by 44% YoY and 81% QoQ. IDFC is seeing some
reluctance by the sponsors to bring in equity due to an uncertain macro
environment, and IDFC also wants to be slightly cautious in a rising rate
environment. However, it is still confident of achieving a 35% CAGR in its loan
book over the next three years. Opex has also increased 50% YoY and 34%
QoQ on account of higher bonus provisions and AMC charges.
Earnings and target price revision
Earnings changes are insignificant. We are reducing our TP by 20% to Rs160
on account of a lower multiple for the financing business from 2.1x to 1.8x and
lower AMC business valuation. The reduction in the target multiple is due to a
50bp reduction in sustainable RoE on assumptions of higher costs and a
marginal increase in cost of equity. Note that our sustainable RoE is around
17.2% compared to the current reported RoE of 13.7%.
Price catalyst
12-month price target: Rs160.00 based on a Sum of Parts methodology.
Catalyst: Strong momentum in loan growth
Action and recommendation
See limited downside; maintain Neutral: IDFC has corrected 30% from its
peak and is now trading at 1.8x FY12E P/BV. Maintain Neutral with a TP of
Rs160.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IDFC
Decent nos. but headwinds remain
Event
Nos. in line with consensus; reduce TP to Rs160 and maintain Neutral:
IDFC reported a 19% YoY increase in 3QFY11 net profit to Rs3.2bn, in line
with consensus. We maintain Neutral but reduce our TP by 20% to Rs160 on
account of a lower valuation for the financing as well as AMC business.
Impact
Spreads maintained at 2.4%: On a 12m rolling basis, spreads have been
maintained at 2.4% QoQ; however, they are down 20bp YoY. We expect
pressure on spreads to remain considering the sharp rise in cost of funds.
IDFC also has a relatively large dependence on short term funding at 15% of
overall borrowings compared to its other infrastructure financing peers.
AMC fees down, AUM reporting structure is now based on outstanding
AUM: AMC fees are down 7% YoY and 16% QoQ. Private equity AUM is
down 25% YoY and QoQ; however, this is mainly due to a change in the
reporting structure. IDFC has started reporting FUM on an outstanding basis
compared to the earlier method of reporting on a committed basis. The PE
fund-I has already seen 6 exits out of 11 investments and as and when exits
occur, fees should reduce but capital gains and carry would be high. This is
unlikely to be the case in PE fund-II where initially there will be no gains
booked as the initial round of exits would confine to returning principal and
hurdle to the investor. The domestic AMC business continues to be under
pressure with AUMs down 28% YoY and 6% QoQ.
Key negatives: Approvals are down sharply for 3Q, higher opex: Gross
approvals are down sharply by 44% YoY and 81% QoQ. IDFC is seeing some
reluctance by the sponsors to bring in equity due to an uncertain macro
environment, and IDFC also wants to be slightly cautious in a rising rate
environment. However, it is still confident of achieving a 35% CAGR in its loan
book over the next three years. Opex has also increased 50% YoY and 34%
QoQ on account of higher bonus provisions and AMC charges.
Earnings and target price revision
Earnings changes are insignificant. We are reducing our TP by 20% to Rs160
on account of a lower multiple for the financing business from 2.1x to 1.8x and
lower AMC business valuation. The reduction in the target multiple is due to a
50bp reduction in sustainable RoE on assumptions of higher costs and a
marginal increase in cost of equity. Note that our sustainable RoE is around
17.2% compared to the current reported RoE of 13.7%.
Price catalyst
12-month price target: Rs160.00 based on a Sum of Parts methodology.
Catalyst: Strong momentum in loan growth
Action and recommendation
See limited downside; maintain Neutral: IDFC has corrected 30% from its
peak and is now trading at 1.8x FY12E P/BV. Maintain Neutral with a TP of
Rs160.
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