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IDFC
▲Neutral Previous: Underweight
IDFC.BO, IDFC IN
Upgrade to Neutral: Valuations undemanding but near-term risks remain
• IDFC reported 3Q FY11 net profit of Rs3.2B, up 19% y/y, which was
~10% lower than our estimate. NII was higher due to one-off treasury
gains, but fee income growth continued to disappoint with a >20% q/q
fall. We upgrade IDFC to Neutral as valuations at ~1.8 FY12E book
now look undemanding, but we see risks on margins from tight liquidity
and on growth from delayed execution.
• 3Q FY11: Trade off between margins and growth: 12-month rolling
spreads were flat sequentially, but loan growth is moderating with just
2% q/q growth. Loan growth has been strong YTD at 40%, and we see
limited risks to management’s target of 3x loan book over FY10-14E.
However, we expect tight liquidity to have an impact on near-term
growth as management is likely to consciously moderate near-term
growth as incremental spreads are under pressure.
• Fees continued to disappoint: Fee income contracted ~23% q/q and
~13% y/y due to low gains from principal investment, a slowdown in
disbursements impacting loan fees, and lower flow business income. We
believe fee income will continue to lag overall profit growth with just
12% growth vs 35% balance sheet growth over FY10-13E.
• Valuations undemanding, but near-term risks remain: With the
~20% underperformance over the past three months, valuations look
undemanding at 1.8x FY12E book, and the gap with PFC/REC has
narrowed to almost nil. But tight liquidity will affect margins over the
next 2-3 quarters, and near-term growth could moderate given pressure
on incremental spreads.
• Upgrade to Neutral; better liquidity and budget could be catalysts:
We adjust our earnings by 0-2% over FY11-13E. We cut our Sep-11 PT
to Rs170 from Rs200 as we lower our target multiple to 13.5x Sep12E
EPS (~16x earlier) as we see increasing risks to growth and margins. But
valuations look undemanding after the ~30% correction; hence our
upgrade to Neutral. We would wait for better system liquidity before
turning more positive. Higher Infra spending in the budget could also be
an upside catalyst.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
IDFC
▲Neutral Previous: Underweight
IDFC.BO, IDFC IN
Upgrade to Neutral: Valuations undemanding but near-term risks remain
• IDFC reported 3Q FY11 net profit of Rs3.2B, up 19% y/y, which was
~10% lower than our estimate. NII was higher due to one-off treasury
gains, but fee income growth continued to disappoint with a >20% q/q
fall. We upgrade IDFC to Neutral as valuations at ~1.8 FY12E book
now look undemanding, but we see risks on margins from tight liquidity
and on growth from delayed execution.
• 3Q FY11: Trade off between margins and growth: 12-month rolling
spreads were flat sequentially, but loan growth is moderating with just
2% q/q growth. Loan growth has been strong YTD at 40%, and we see
limited risks to management’s target of 3x loan book over FY10-14E.
However, we expect tight liquidity to have an impact on near-term
growth as management is likely to consciously moderate near-term
growth as incremental spreads are under pressure.
• Fees continued to disappoint: Fee income contracted ~23% q/q and
~13% y/y due to low gains from principal investment, a slowdown in
disbursements impacting loan fees, and lower flow business income. We
believe fee income will continue to lag overall profit growth with just
12% growth vs 35% balance sheet growth over FY10-13E.
• Valuations undemanding, but near-term risks remain: With the
~20% underperformance over the past three months, valuations look
undemanding at 1.8x FY12E book, and the gap with PFC/REC has
narrowed to almost nil. But tight liquidity will affect margins over the
next 2-3 quarters, and near-term growth could moderate given pressure
on incremental spreads.
• Upgrade to Neutral; better liquidity and budget could be catalysts:
We adjust our earnings by 0-2% over FY11-13E. We cut our Sep-11 PT
to Rs170 from Rs200 as we lower our target multiple to 13.5x Sep12E
EPS (~16x earlier) as we see increasing risks to growth and margins. But
valuations look undemanding after the ~30% correction; hence our
upgrade to Neutral. We would wait for better system liquidity before
turning more positive. Higher Infra spending in the budget could also be
an upside catalyst.
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