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IDFC
Neutral
IDFC.BO, IDFC IN
Limited upside, maintain Neutral
• We maintain Neutral on IDFC as we see little upside: The 4Q FY11
profit miss illustrates our fears about loan and fee growth. Margin
recovery is at least a couple of quarters away, in our view, and the large
power exposure continues to be an overhang for otherwise robust asset
quality. We believe the apparently undemanding 1.7x FY12E book
masks structural ROE pressures.
• Margin recovery at least two quarters away: 12m rolling spreads
have moderated over the past 2-3 quarters, and sequential spreads were
flat in 4Q FY11. Incremental lending spreads have stabilized at ~2.2-
2.5% and management expects margins to bounce back in 2HFY12 - we
think that's the best-case scenario.
• Growth to moderate: After ~50% growth in FY11, management
expects growth to moderate in FY12 to ~25%. Power sector growth
should be more calibrated now as projects face fuel linkage and offtake
issues. With power contributing ~45% of exposure, moderating growth
in the power book is likely to slow down overall loan growth, although
credit demand for road infrastructure is picking up.
• Management confident of asset quality: With stringent standards on
assessing fuel and offtake risks, management seemed confident of asset
quality in the power space. Gross NPAs were flat in FY11 and we do not
expect any near-term asset quality issues for IDFC. We remain worried
about the power sector, and any restructuring here, even if it’s not an
IDFC exposure, could negatively impact valuations.
• Maintain Neutral; reduce PT to Rs155: We cut our earnings estimates
by 4-7% for FY12-14E as we factor in lower loan growth at 26-27% (vs
30% earlier) and lower fee income. We thus decrease our Gordon growth
based Mar-12 PT to Rs155 (from Rs165 earlier). Valuation at 1.7x
FY12E book (13.3x FY12 EPS) appears undemanding. but slowing loan
growth could put pressure on profit growth in the near term. Capital
market buoyancy could lead to higher-than-expected gains from the
equity book and is a key upside risk to our PT
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IDFC
Neutral
IDFC.BO, IDFC IN
Limited upside, maintain Neutral
• We maintain Neutral on IDFC as we see little upside: The 4Q FY11
profit miss illustrates our fears about loan and fee growth. Margin
recovery is at least a couple of quarters away, in our view, and the large
power exposure continues to be an overhang for otherwise robust asset
quality. We believe the apparently undemanding 1.7x FY12E book
masks structural ROE pressures.
• Margin recovery at least two quarters away: 12m rolling spreads
have moderated over the past 2-3 quarters, and sequential spreads were
flat in 4Q FY11. Incremental lending spreads have stabilized at ~2.2-
2.5% and management expects margins to bounce back in 2HFY12 - we
think that's the best-case scenario.
• Growth to moderate: After ~50% growth in FY11, management
expects growth to moderate in FY12 to ~25%. Power sector growth
should be more calibrated now as projects face fuel linkage and offtake
issues. With power contributing ~45% of exposure, moderating growth
in the power book is likely to slow down overall loan growth, although
credit demand for road infrastructure is picking up.
• Management confident of asset quality: With stringent standards on
assessing fuel and offtake risks, management seemed confident of asset
quality in the power space. Gross NPAs were flat in FY11 and we do not
expect any near-term asset quality issues for IDFC. We remain worried
about the power sector, and any restructuring here, even if it’s not an
IDFC exposure, could negatively impact valuations.
• Maintain Neutral; reduce PT to Rs155: We cut our earnings estimates
by 4-7% for FY12-14E as we factor in lower loan growth at 26-27% (vs
30% earlier) and lower fee income. We thus decrease our Gordon growth
based Mar-12 PT to Rs155 (from Rs165 earlier). Valuation at 1.7x
FY12E book (13.3x FY12 EPS) appears undemanding. but slowing loan
growth could put pressure on profit growth in the near term. Capital
market buoyancy could lead to higher-than-expected gains from the
equity book and is a key upside risk to our PT
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