IDFC -Robust balance sheet growth:: Macquarie Research

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IDFC
Robust balance sheet growth
Event
 IDFC is the largest private infrastructure financing company in India. The
company has a total infrastructure loan book size of Rs344bn with lending to
energy, transportation and telecom being the largest. Over time, the company
has also diversified into various fees providing businesses like investment
banking, asset management, private equity and project equity.

Impact
 Growth outlook slower but still healthy. IDFC management believes
that the outlook for growth is lower in FY2012 compared to FY2011 due to a
weak macroeconomic environment. However it is nowhere near the levels
seen during the global financial crisis and loan growth will likely be healthy
though lower than the levels seen in FY2011. They have front-ended their
loan growth this year as the outlook was healthy, and hence they expect the
loan book to grow at 50% YoY by end-FY2011. They maintain their target of
tripling the loan book on the base of Mar-2010 within a timeframe of 36-48
months. If we assume 48 months, the implied loan growth over the next
three years would be a healthy figure of 26%.
 Headwinds to spreads remain: On a 12m rolling basis, spreads have been
maintained at 2.4% in 3Q11. This is however down 20bps YoY. We expect
pressure on spreads to remain considering the sharp rise in the cost of funds.
IDFC also has relatively larger dependence on short term funding at 15% of
overall borrowings compared to its other infrastructure financing peers.
 Limited scope to increase RoE: We believe the key issue that is limiting
IDFC’s potential to improve its RoE is leverage, which is unlikely to expand
due to regulatory and rating agencies’ restrictions. Growth indeed is coming
back, but spreads are likely to witness compression as wholesale borrowing
costs rise, thereby resulting in compression in ROA. Rating worries have not
disappeared completely and as growth picks up, credit rating agencies will
clearly be mindful of the IDFC’s rating.
Action and recommendation
 See limited downside; Maintain Neutral: IDFC has corrected 30% from its
peak and is now trading at 1.7x FY12E P/BV. We maintain our Neutral with a
TP of Rs160.


IDFC Aide Memoire
1. How has the wholesale funding cost moved in the last six months? What was the coupon for the latest bond offering?
2. Your dependence on less short-term funding is 15%. Are you looking to reduce it going forward?
3. What is your outlook on the liquidity tightness? Do you think it will ease in the next 2-3 months?
4. What are the incremental spreads you are making on loans?
5. Where do you see your spreads stabilising in the current tightening cycle?
6. What are the key drivers for loan growth for you going forward?
7. What are the biggest risks to project execution you are seeing in the current environment?
8. Do you see promoter equity as a constraint for execution?
9. How big is the risk of defaulting SEBs to the power sector?
10. What is your contingent planning in case SEBs do default?
11. What is the outlook of investment revival in the roads and ports sector?
12. Do you see lesser competition from banks on margins given their ALM concerns?
13. How is takeout financing evolving in the sector? What is your experience of the same?
14. What is your view on fees from investment banking and the AMC business given that the competition/regulatory
environment is adverse and you have already made substantial investments in the two businesses?