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‘Core’ business doing good
For 4QFY11, IDFC’s consolidated profit of Rs2.9bn (up 25% YoY) was
lower than estimate due to Rs450mn MTM loss on equity investments.
Operating performance was encouraging with (1) pick in lending activity
(loans up 50% with healthy sanctions), (2) widening of spreads and (3)
decline in cost/ income ratio. We were tad disappointed by lower core
fees. We lower estimates for FY12-13 by 2-4% to build lower treasury
gains and higher tax rate, but still expect 31% Cagr in profit over FY11-
13. Healthy loan growth, in spite of macro challenges, may abate some
concerns and support re-rating. Maintain BUY with price target of Rs230.
Healthy loan growth in challenging times; spreads also expand
Over the past six months, various macro challenges have emerged that have
posed risks to India’s investment cycle. In this context, IDFC’s loan growth of
50% YoY (7% QoQ) and rise in sanctions (up 66% QoQ) could abate some
concerns on IDFC’s ability to achieve its ambitious asset growth targets. While
management is committed to delivering 30-35% Cagr in loans over next 2-3
years, it reiterated that growth is likely to be uneven. More importantly, pick
up in loan growth was not at the cost of spreads, which have expanded QoQ,
despite rise in wholesale funding costs. Even as 4Q spreads expanded QoQ,
12 month rolling spreads contracted 20bps to 2.2% due to the rollover effect.
Treasury and fees disappoint once again; C/I ratio falls
In 4Q IDFC provided ~Rs450m towards MTM losses on its equity investments,
although this was to an extent due to conservative accounting, nonetheless it
is disappointing. Adjusted for a re-org (see figure 8), 9% YoY fall in core fees
was disappointing. We are positively surprised by fall in cost/ income ratio
from 27% in FY10 to 22% in FY11; management expects more improvement.
Asset quality: IDFC’s power exposure better than others
Management highlighted that projects in power and road sectors are facing
challenges that have dented returns of equity investors. However, due to its
careful selection of projects/ promoters and conservative estimates on profit
of projects, IDFC does not see any such stress on its exposure to the sectors.
IDFC’s gross NPAs are low at 21bps of loans and a high provisioning (1.6% of
loans) will provide buffer against potential asset quality risks.
Maintain BUY
Over FY11-13, we expect loans to grow at 35% Cagr and drive 31% Cagr in
profit (2-4% cut in profit over FY12-13 is due to lower treasury gains and rise
in tax rate). Healthy loan growth, in spite of macro challenges, could abate
some concerns and support re-rating. Maintain BUY with price target of Rs230.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
‘Core’ business doing good
For 4QFY11, IDFC’s consolidated profit of Rs2.9bn (up 25% YoY) was
lower than estimate due to Rs450mn MTM loss on equity investments.
Operating performance was encouraging with (1) pick in lending activity
(loans up 50% with healthy sanctions), (2) widening of spreads and (3)
decline in cost/ income ratio. We were tad disappointed by lower core
fees. We lower estimates for FY12-13 by 2-4% to build lower treasury
gains and higher tax rate, but still expect 31% Cagr in profit over FY11-
13. Healthy loan growth, in spite of macro challenges, may abate some
concerns and support re-rating. Maintain BUY with price target of Rs230.
Healthy loan growth in challenging times; spreads also expand
Over the past six months, various macro challenges have emerged that have
posed risks to India’s investment cycle. In this context, IDFC’s loan growth of
50% YoY (7% QoQ) and rise in sanctions (up 66% QoQ) could abate some
concerns on IDFC’s ability to achieve its ambitious asset growth targets. While
management is committed to delivering 30-35% Cagr in loans over next 2-3
years, it reiterated that growth is likely to be uneven. More importantly, pick
up in loan growth was not at the cost of spreads, which have expanded QoQ,
despite rise in wholesale funding costs. Even as 4Q spreads expanded QoQ,
12 month rolling spreads contracted 20bps to 2.2% due to the rollover effect.
Treasury and fees disappoint once again; C/I ratio falls
In 4Q IDFC provided ~Rs450m towards MTM losses on its equity investments,
although this was to an extent due to conservative accounting, nonetheless it
is disappointing. Adjusted for a re-org (see figure 8), 9% YoY fall in core fees
was disappointing. We are positively surprised by fall in cost/ income ratio
from 27% in FY10 to 22% in FY11; management expects more improvement.
Asset quality: IDFC’s power exposure better than others
Management highlighted that projects in power and road sectors are facing
challenges that have dented returns of equity investors. However, due to its
careful selection of projects/ promoters and conservative estimates on profit
of projects, IDFC does not see any such stress on its exposure to the sectors.
IDFC’s gross NPAs are low at 21bps of loans and a high provisioning (1.6% of
loans) will provide buffer against potential asset quality risks.
Maintain BUY
Over FY11-13, we expect loans to grow at 35% Cagr and drive 31% Cagr in
profit (2-4% cut in profit over FY12-13 is due to lower treasury gains and rise
in tax rate). Healthy loan growth, in spite of macro challenges, could abate
some concerns and support re-rating. Maintain BUY with price target of Rs230.
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