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IDFC
Good NII Progression in F3Q11
What's Changed
Price Target Rs215 to Rs175
EPS F11e/12e/13e -9%/-15%/-14%
IDFC reported a PAT of Rs3.2 bn (-5% QoQ / +18%
YoY) – in line with our expectations. NII growth was
stronger than expected; however, this was offset by
lower non-interest income and higher opex. EPS was
down 8% QoQ and flat YoY (given equity issuance).
Key highlights from the results:
a) Infra loan growth moderated to 2% QoQ / 51% YoY
from 19% QoQ / 56% YoY in the previous quarter.
b) Outstanding disbursements to telecom were down
14% QoQ – but energy & transportation were up 9%
and 11%, respectively.
c) Underlying NII on infra loans grew by 20% QoQ /
26% YoY – as the impact of back-ended loan
growth in the previous quarter filtered through.
d) Cost:income moved up to 25% from 19% in the
previous quarter.
e) Non-interest income (ex-cap gains) was up 27%
YoY but down 34% QoQ.
Reducing price target / estimates: We have cut our
price target from Rs215 to 175. We now apply a 25%
probability to our bear case scenario (5% previously) to
factor in increased uncertainty about economic growth
following recent developments with regard to inflation /
liquidity. We also cut our earnings estimates primarily to
factor in lower loan (32.5% in F12/13 vs. 45%
previously) and revenue growth assumptions.
Maintain EW: We believe IDFC is well placed to benefit
from the pickup in infra spending in India. However, EPS
growth will likely continue to trail volume growth given
margin pressures from wholesale funding nature and
regulatory norms on single-party lending, etc. We would
wait for valuations (14x F2012e P/E and 1.6x BV;
adjusted for NSE) to correct / digest further.
Target Price Discussion – IDFC
We arrive at our new price target of Rs175 per share (down
19% from Rs215 previously) using a probability-weighted
sum-of-parts method.
Our new price target reflects the following:
a) Earnings estimate revisions. We have taken down our
earnings forecasts for F2012 and F2013 by 15% and 14%
respectively. Our forecast changes reflect the following: a) We
now estimate lower loan growth estimates of 32.5% average in
F2012/13 versus 45% previously. This is to reflect the
increased economic uncertainty caused by recent events
(inflation concerns and inter-bank liquidity remaining tighter for
longer). We also build in a sharper margin decline owing to the
same macro uncertainty. b) We have also taken down the
capital gain assumptions for IDFC.
b) Probability weightings. We are also now using the
following probability weightings:
• Bear case scenario: We have increased our bear case
probability to 25% (from 5% previously) to factor in the
increased economic growth uncertainty following recent
developments with regard to inflation and inter-bank
liquidity. IDFC is wholesale funded in nature and is
dependent on strong business confidence for private
infrastructure spending – thus we believe its growth
dynamics are more levered to the economic growth
environment.
• Bull case scenario: Our bull case assumes that margins
remain stable versus current levels – given the macro
backdrop we discussed earlier, we believe that there is
lower probability of this scenario panning out – hence
reduce the probability to 15% from 25% previously.
• Base case scenario: Our base case scenario assumes
loan growth of 32.5% in F2012-13. We expect margin
pressures to persist for the next few quarters but assume
that inflation moderates at some stage – and not constrain
economic growth materially. We assign a 60% probability
to this scenario (versus 75% previously).
We have reduced our bull case value by 11%, to Rs250 per
share, and our base case value by 9%, to Rs183 per share and
our bear case value by 8% to Rs110 per share.
We value the consolidated entity (which includes income
streams from the asset management and investment banking
businesses) using a three-phase residual income model – a
five-year high growth period, 10-year maturity period followed
by a declining period. We use a cost of equity of 14.1% (up
from 13.9%), assuming a beta of 1.0, a risk-free rate of 8.1%
(current Indian 10-year government bond yield, up from 7.9%),
and a market risk premium of 6%.
We value IDFC’s stake in National Stock Exchange (NSE)
separately using an earnings multiple method in line with
regional peers (27x 2011e P/E). Our assumptions and values
here are unchanged.
Key risks to our target price are: weaker-than expected
profitability due to sustained slowdown in economy, resulting in
weakness in loan growth, flat to some compression in margins,
and lower growth in fee income. Higher-than-expected credit
cost is also a key earnings risk.
The upside risks are ability to leverage up balance sheet and
continued strength in NIMs.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
IDFC
Good NII Progression in F3Q11
What's Changed
Price Target Rs215 to Rs175
EPS F11e/12e/13e -9%/-15%/-14%
IDFC reported a PAT of Rs3.2 bn (-5% QoQ / +18%
YoY) – in line with our expectations. NII growth was
stronger than expected; however, this was offset by
lower non-interest income and higher opex. EPS was
down 8% QoQ and flat YoY (given equity issuance).
Key highlights from the results:
a) Infra loan growth moderated to 2% QoQ / 51% YoY
from 19% QoQ / 56% YoY in the previous quarter.
b) Outstanding disbursements to telecom were down
14% QoQ – but energy & transportation were up 9%
and 11%, respectively.
c) Underlying NII on infra loans grew by 20% QoQ /
26% YoY – as the impact of back-ended loan
growth in the previous quarter filtered through.
d) Cost:income moved up to 25% from 19% in the
previous quarter.
e) Non-interest income (ex-cap gains) was up 27%
YoY but down 34% QoQ.
Reducing price target / estimates: We have cut our
price target from Rs215 to 175. We now apply a 25%
probability to our bear case scenario (5% previously) to
factor in increased uncertainty about economic growth
following recent developments with regard to inflation /
liquidity. We also cut our earnings estimates primarily to
factor in lower loan (32.5% in F12/13 vs. 45%
previously) and revenue growth assumptions.
Maintain EW: We believe IDFC is well placed to benefit
from the pickup in infra spending in India. However, EPS
growth will likely continue to trail volume growth given
margin pressures from wholesale funding nature and
regulatory norms on single-party lending, etc. We would
wait for valuations (14x F2012e P/E and 1.6x BV;
adjusted for NSE) to correct / digest further.
Target Price Discussion – IDFC
We arrive at our new price target of Rs175 per share (down
19% from Rs215 previously) using a probability-weighted
sum-of-parts method.
Our new price target reflects the following:
a) Earnings estimate revisions. We have taken down our
earnings forecasts for F2012 and F2013 by 15% and 14%
respectively. Our forecast changes reflect the following: a) We
now estimate lower loan growth estimates of 32.5% average in
F2012/13 versus 45% previously. This is to reflect the
increased economic uncertainty caused by recent events
(inflation concerns and inter-bank liquidity remaining tighter for
longer). We also build in a sharper margin decline owing to the
same macro uncertainty. b) We have also taken down the
capital gain assumptions for IDFC.
b) Probability weightings. We are also now using the
following probability weightings:
• Bear case scenario: We have increased our bear case
probability to 25% (from 5% previously) to factor in the
increased economic growth uncertainty following recent
developments with regard to inflation and inter-bank
liquidity. IDFC is wholesale funded in nature and is
dependent on strong business confidence for private
infrastructure spending – thus we believe its growth
dynamics are more levered to the economic growth
environment.
• Bull case scenario: Our bull case assumes that margins
remain stable versus current levels – given the macro
backdrop we discussed earlier, we believe that there is
lower probability of this scenario panning out – hence
reduce the probability to 15% from 25% previously.
• Base case scenario: Our base case scenario assumes
loan growth of 32.5% in F2012-13. We expect margin
pressures to persist for the next few quarters but assume
that inflation moderates at some stage – and not constrain
economic growth materially. We assign a 60% probability
to this scenario (versus 75% previously).
We have reduced our bull case value by 11%, to Rs250 per
share, and our base case value by 9%, to Rs183 per share and
our bear case value by 8% to Rs110 per share.
We value the consolidated entity (which includes income
streams from the asset management and investment banking
businesses) using a three-phase residual income model – a
five-year high growth period, 10-year maturity period followed
by a declining period. We use a cost of equity of 14.1% (up
from 13.9%), assuming a beta of 1.0, a risk-free rate of 8.1%
(current Indian 10-year government bond yield, up from 7.9%),
and a market risk premium of 6%.
We value IDFC’s stake in National Stock Exchange (NSE)
separately using an earnings multiple method in line with
regional peers (27x 2011e P/E). Our assumptions and values
here are unchanged.
Key risks to our target price are: weaker-than expected
profitability due to sustained slowdown in economy, resulting in
weakness in loan growth, flat to some compression in margins,
and lower growth in fee income. Higher-than-expected credit
cost is also a key earnings risk.
The upside risks are ability to leverage up balance sheet and
continued strength in NIMs.
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