Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
INFRASTRUCTURE DEVELOPMENT FINANCE
Margins expand; growth and fee income moderates
In Q3FY11, IDFC reported PAT of INR 3.2 bn, a growth of 19% Y-o-Y (lower than our
expectation of INR 3.5 bn).
• Net interest income catapulted a stupendous 65% Y-o-Y (23% Q-o-Q),
benefiting from margin expansion (to 3.9% from 3.5% in Q2FY11) and higher
loan averages during the quarter.
• After management’s conscious decision to front-end balance sheet growth in
H1FY11 (37% YTD growth till H1FY11), momentum in asset growth slipped in
Q3FY11 primarily due to run down in short-term loans extended to the telecom
sector in Q1FY11. Even sanctions came off significantly to INR 37 bn in Q3FY11
(compared to INR 328 bn in H1FY11) and management attributed this to rising
interest rate scenario, environmental clearance issues in some projects, and
one-off demand in telecom in H1FY11.
• Fee income was modest (up 26% Y-o-Y) reflecting cyclicality of revenue streams
(investment banking and asset management businesses). Principal investment
revenues were lower at INR 300 mn (compared to INR 1.3 bn in H1FY11 and INR
600 mn in Q3FY10).
• Operating expenses inched up 32% sequentially as IDFC streamlined bonus
provisions on a quarterly basis against previous practice of booking them only in
Q4 (provided for INR 900 mn of bonus in 9mFY11).
�� Growth momentum moderates
Traction in loan book slipped to 2% Q-o-Q growth (after growing 37% in
H1FY11). While power and transportation continued the momentum, run down in
short-term loans led to sharp decline in exposure to the telecom sector. To an
extent, it seems that rising interest rates, coupled with environment clearance
issues is taking some toll on overall growth momentum. Disbursements growth,
which was more than 2x in the past two quarters, cooled down to 68% Y-o-Y.
Sequentially, while project loans grew 8%, corporate loans and LAS declined
6%. While there are macro-economic challenges, management still maintains
medium target of tripling its balance sheet size over the next three-four years.
�� Outlook and valuations: Near-term RoEs under pressure; maintain
‘HOLD’
Led by fresh capital infusion and considering the momentum in loan growth in
H1FY11, we are building in loan growth of 39% CAGR over FY10-12. While we are
revising up our margin assumption, it is offset by modest fee income. We are
building in EPS CAGR of 17% over FY10-12. However, RoE will remain subdued at
~14% due to front-ended capital raising. Our SOTP fair value for the stock stands
at INR 172 per share and we maintain ‘HOLD’ recommendation on the stock and
rate it ‘Sector Performer’ on relative return basis.
�� Calculated margins expand to 3.9%
During the quarter, IDFC’s margins expanded more than ~35bps to 3.9% (highest ever
reported in past few years) benefiting from increase in yields as full impact of buoyant
growth towards the end of the last quarter being felt. Moreover, higher capital floats of
INR 35 bn (raised via QIP) provided some support. Total borrowings increased a mere
2% Q-o-Q and cost of funds is estimated to have jumped 40bps during the quarter
(against more than 80bps rise in yields). Management expects some pressure on spreads
in this part of credit and interest rate cycle. Relative to wholesale borrowings, focus will
be more on mobilising retail and ECBs over the next couple of quarters. We are building
in 30-40bps compression in spreads over FY11-13E.
�� Modest fee income performance
• Fee income was modest (up 26% Y-o-Y) reflecting cyclicality of revenue streams.
While earnings growth in broking business was under pressure (in line with industry
trend), investment banking fee was modest compared to higher base in Q2FY11.
• Asset management fee came off 16% Q-o-Q as domestic MF AUMs declined 9% on a
quarterly basis and there were some exits in private equity funds as well which
came off 25% Q-o-Q.
• Also lower sanctions in Q3FY11 led to dismal loan related fees.
�� Other highlights
Asset quality remained stable at impressive levels; gross NPA at 0.22%, while net NPA at
0.1% in Q3FY11. IDFC has refined its general provisioning policy to consider only those
part of loan assets that are on book and not for loans that are sold down.
Company Description
IDFC was established in 1997 as a private sector enterprise by a consortium of public
and private investors to provide infrastructure financing. It was mainly started as a
government initiative, but the structure of ownership changed in 2005-06 with its IPO.
Government of India has a 20% stake while FII hold ~40%.
It generates its income from core lending, as well has built a steady source of fee income
business from its principal investments, asset management as well broking and
investment from its acquisition of IDFC-SSKI.
�� Investment Rationale
IDFC generates its business in four business segments
In the lending business, it has a balance sheet size of INR 480 bn as on Q3FY11 and has
been growing its balance sheet in excess of 40% CAGR till FY08 before slowing down in
FY09. Of its INR 350 bn loan book (net NPA is 0.2%), energy, transportation, and
telecom sectors constitute ~75% of the outstanding. We expect the loan book to grow
by over 39% CAGR for FY10/12 to ~INR 482 bn and generate RoA’s in the range of 3%.
It has sponsored IDFC Private Equity that manages three funds - India Development
Fund and IDFC Private Equity Fund 2 and IDFC Private Equity Fund 3. The total corpus of
the two funds as on FY09 was USD 1.3 bn. Also, it has a project equity fund which is
~USD 900 mn. It generates fee income for managing the assets and also participates on
upsides over the respective hurdle rates. In FY09, it acquired Standard Chartered Mutual
Fund for USD 205 mn.
It has 100% stake in IDFC-SSKI where it houses the investment banking and
institutional broking business. As of Q1FY11 it had a strong principal investment book of
INR 17.4 bn which is invested through listed and unlisted entities.
�� Key Risks
There are risks of margin compression, as the infrastructure financing space is keenly
contested. Being an NBFC, IDFC is dependent on wholesale funding. Hence, high interest
rates will remain a risk.
Large ticket lending makes IDFC’s loan book riskier than other banks. NPA occurrence,
due to large ticket size, can dent its future earnings.
As it now generates more than 40% of non interest income, revenue can be a lumpy in
nature (especially in investment banking and principal investment book)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
INFRASTRUCTURE DEVELOPMENT FINANCE
Margins expand; growth and fee income moderates
In Q3FY11, IDFC reported PAT of INR 3.2 bn, a growth of 19% Y-o-Y (lower than our
expectation of INR 3.5 bn).
• Net interest income catapulted a stupendous 65% Y-o-Y (23% Q-o-Q),
benefiting from margin expansion (to 3.9% from 3.5% in Q2FY11) and higher
loan averages during the quarter.
• After management’s conscious decision to front-end balance sheet growth in
H1FY11 (37% YTD growth till H1FY11), momentum in asset growth slipped in
Q3FY11 primarily due to run down in short-term loans extended to the telecom
sector in Q1FY11. Even sanctions came off significantly to INR 37 bn in Q3FY11
(compared to INR 328 bn in H1FY11) and management attributed this to rising
interest rate scenario, environmental clearance issues in some projects, and
one-off demand in telecom in H1FY11.
• Fee income was modest (up 26% Y-o-Y) reflecting cyclicality of revenue streams
(investment banking and asset management businesses). Principal investment
revenues were lower at INR 300 mn (compared to INR 1.3 bn in H1FY11 and INR
600 mn in Q3FY10).
• Operating expenses inched up 32% sequentially as IDFC streamlined bonus
provisions on a quarterly basis against previous practice of booking them only in
Q4 (provided for INR 900 mn of bonus in 9mFY11).
�� Growth momentum moderates
Traction in loan book slipped to 2% Q-o-Q growth (after growing 37% in
H1FY11). While power and transportation continued the momentum, run down in
short-term loans led to sharp decline in exposure to the telecom sector. To an
extent, it seems that rising interest rates, coupled with environment clearance
issues is taking some toll on overall growth momentum. Disbursements growth,
which was more than 2x in the past two quarters, cooled down to 68% Y-o-Y.
Sequentially, while project loans grew 8%, corporate loans and LAS declined
6%. While there are macro-economic challenges, management still maintains
medium target of tripling its balance sheet size over the next three-four years.
�� Outlook and valuations: Near-term RoEs under pressure; maintain
‘HOLD’
Led by fresh capital infusion and considering the momentum in loan growth in
H1FY11, we are building in loan growth of 39% CAGR over FY10-12. While we are
revising up our margin assumption, it is offset by modest fee income. We are
building in EPS CAGR of 17% over FY10-12. However, RoE will remain subdued at
~14% due to front-ended capital raising. Our SOTP fair value for the stock stands
at INR 172 per share and we maintain ‘HOLD’ recommendation on the stock and
rate it ‘Sector Performer’ on relative return basis.
�� Calculated margins expand to 3.9%
During the quarter, IDFC’s margins expanded more than ~35bps to 3.9% (highest ever
reported in past few years) benefiting from increase in yields as full impact of buoyant
growth towards the end of the last quarter being felt. Moreover, higher capital floats of
INR 35 bn (raised via QIP) provided some support. Total borrowings increased a mere
2% Q-o-Q and cost of funds is estimated to have jumped 40bps during the quarter
(against more than 80bps rise in yields). Management expects some pressure on spreads
in this part of credit and interest rate cycle. Relative to wholesale borrowings, focus will
be more on mobilising retail and ECBs over the next couple of quarters. We are building
in 30-40bps compression in spreads over FY11-13E.
�� Modest fee income performance
• Fee income was modest (up 26% Y-o-Y) reflecting cyclicality of revenue streams.
While earnings growth in broking business was under pressure (in line with industry
trend), investment banking fee was modest compared to higher base in Q2FY11.
• Asset management fee came off 16% Q-o-Q as domestic MF AUMs declined 9% on a
quarterly basis and there were some exits in private equity funds as well which
came off 25% Q-o-Q.
• Also lower sanctions in Q3FY11 led to dismal loan related fees.
�� Other highlights
Asset quality remained stable at impressive levels; gross NPA at 0.22%, while net NPA at
0.1% in Q3FY11. IDFC has refined its general provisioning policy to consider only those
part of loan assets that are on book and not for loans that are sold down.
Company Description
IDFC was established in 1997 as a private sector enterprise by a consortium of public
and private investors to provide infrastructure financing. It was mainly started as a
government initiative, but the structure of ownership changed in 2005-06 with its IPO.
Government of India has a 20% stake while FII hold ~40%.
It generates its income from core lending, as well has built a steady source of fee income
business from its principal investments, asset management as well broking and
investment from its acquisition of IDFC-SSKI.
�� Investment Rationale
IDFC generates its business in four business segments
In the lending business, it has a balance sheet size of INR 480 bn as on Q3FY11 and has
been growing its balance sheet in excess of 40% CAGR till FY08 before slowing down in
FY09. Of its INR 350 bn loan book (net NPA is 0.2%), energy, transportation, and
telecom sectors constitute ~75% of the outstanding. We expect the loan book to grow
by over 39% CAGR for FY10/12 to ~INR 482 bn and generate RoA’s in the range of 3%.
It has sponsored IDFC Private Equity that manages three funds - India Development
Fund and IDFC Private Equity Fund 2 and IDFC Private Equity Fund 3. The total corpus of
the two funds as on FY09 was USD 1.3 bn. Also, it has a project equity fund which is
~USD 900 mn. It generates fee income for managing the assets and also participates on
upsides over the respective hurdle rates. In FY09, it acquired Standard Chartered Mutual
Fund for USD 205 mn.
It has 100% stake in IDFC-SSKI where it houses the investment banking and
institutional broking business. As of Q1FY11 it had a strong principal investment book of
INR 17.4 bn which is invested through listed and unlisted entities.
�� Key Risks
There are risks of margin compression, as the infrastructure financing space is keenly
contested. Being an NBFC, IDFC is dependent on wholesale funding. Hence, high interest
rates will remain a risk.
Large ticket lending makes IDFC’s loan book riskier than other banks. NPA occurrence,
due to large ticket size, can dent its future earnings.
As it now generates more than 40% of non interest income, revenue can be a lumpy in
nature (especially in investment banking and principal investment book)
No comments:
Post a Comment