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IDFC (IDFC.BO; Rs135.20; 1M)
Takeaways from Mumbai — IDFC management presented at our India Investor
Conference in Mumbai today. Key highlights are as below:
Outlook on overall infrastructure environment — There has been a lot of
issues surrounding the infrastructure space recently, especially in the power
segment. Management is of the opinion that most current concerns are related to
execution, and will likely see some improvement in 2H12. However, fuel/coal
linkage is the more serious concern - partly executional (can be fixed), but partly
also structural and could lead to overall slower growth in power capacity
additions medium term. The good parts - renewable energy will get relatively
more focus & improved execution for road projects - will likely be key growth
areas.
IDFC's loan growth should remain healthy — IDFC management remained
confident of loan growth, and although slower in 1H12 (high single digits
sequentially), it should pick-up in 2H12 with overall FY12 growth of around 25%.
Key drivers could be power (undisbursed sanctions largely, fresh sanctions may
pick-up later) and roads. Longer term, management remains more confident of
the growth outlook and is not changing its guidance of doubling loan book
between FY11-FY14.
NIM pressure likely to ease off in next few months — Management says NIM
pressure is seeing signs of easing as banks have been raising their lending rates
and interest spreads have limited downside from current levels (2.2% currently).
While there is some immediate pressure, these should moderate as the interest
rate environment stabilizes.
Asset quality: Still too early to talk of impairments — IDFC management
believes it is still too early to talk about meaningful impairments to its loans as
most of the power exposure is in operational assets (55% of total power
exposure) and only 45% is under construction. Also it does not have much
exposure to the merchant power segments (has had caps on exposure to
merchant power) and believes key in asset quality will be selection of the
sponsors - IDFC relatively well placed.
Capital market businesses — With regards to the outlook on market segments
for IDFC, broking, investment banking, and asset management remain
challenging as increasing competitive intensity has impacted profitability. Also,
loan related fees could slow as incremental disbursements are lower in FY12.
Principal investments remain volatile and difficult to predict (would be challenging
to see meaningful upsides in the current environment).
Infrastructure Development Finance
(IDFC.BO; Rs133.45; 1M)
Valuation
We value IDFC at Rs174 based on our sum-of-the-parts methodology. We value
IDFC's core lending business at Rs142 per share; we prefer a P/BV multiple of 2.0x
1yr-Fwd BV benchmarked towards the lower band of private banks' target P/BV
multiples, given its sub-15% core ROE. This reflects IDFC's premium positioning in
the infrastructure segment, strong management, long track record of low asset risks
and relatively high growth profile. However, its target multiple is constrained by its
lack of retail asset, liability and distribution franchises relative to premier private
bank franchises. We value the asset management business as a percentage of
assets and value this business at Rs9 per share sub-divided into Rs5 for the private
equity segment (7% of AUMs) and Rs4 for the Stanchart AMC business (4% of
AUMs). We value IDFC's broking and investment banking business at Rs5 per
share based on 15x 1yr Fwd profits. Finally, we also add Rs18 for IDFC's
investment portfolio including the NSE (valued in-line with the last reported
transaction).
Risks
We rate IDFC shares Medium Risk, even as our quantitative risk system, which
tracks 260-day historical share price volatility, suggests Low Risk. While IDFC’s
increasing scale and strong asset quality track record, reduce risks, we believe its
mono-segment lending and inherent exposure to capital markets increase its risk
profile. Key downside risks that could restrict the stock from achieving our target
price include: a) Sharp increases in interest rates; b) Significant slowdown in
infrastructure growth and asset quality; c) Continued softness in capital markets for
a relatively longer period; d) Regulatory changes and a higher tax rate.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IDFC (IDFC.BO; Rs135.20; 1M)
Takeaways from Mumbai — IDFC management presented at our India Investor
Conference in Mumbai today. Key highlights are as below:
Outlook on overall infrastructure environment — There has been a lot of
issues surrounding the infrastructure space recently, especially in the power
segment. Management is of the opinion that most current concerns are related to
execution, and will likely see some improvement in 2H12. However, fuel/coal
linkage is the more serious concern - partly executional (can be fixed), but partly
also structural and could lead to overall slower growth in power capacity
additions medium term. The good parts - renewable energy will get relatively
more focus & improved execution for road projects - will likely be key growth
areas.
IDFC's loan growth should remain healthy — IDFC management remained
confident of loan growth, and although slower in 1H12 (high single digits
sequentially), it should pick-up in 2H12 with overall FY12 growth of around 25%.
Key drivers could be power (undisbursed sanctions largely, fresh sanctions may
pick-up later) and roads. Longer term, management remains more confident of
the growth outlook and is not changing its guidance of doubling loan book
between FY11-FY14.
NIM pressure likely to ease off in next few months — Management says NIM
pressure is seeing signs of easing as banks have been raising their lending rates
and interest spreads have limited downside from current levels (2.2% currently).
While there is some immediate pressure, these should moderate as the interest
rate environment stabilizes.
Asset quality: Still too early to talk of impairments — IDFC management
believes it is still too early to talk about meaningful impairments to its loans as
most of the power exposure is in operational assets (55% of total power
exposure) and only 45% is under construction. Also it does not have much
exposure to the merchant power segments (has had caps on exposure to
merchant power) and believes key in asset quality will be selection of the
sponsors - IDFC relatively well placed.
Capital market businesses — With regards to the outlook on market segments
for IDFC, broking, investment banking, and asset management remain
challenging as increasing competitive intensity has impacted profitability. Also,
loan related fees could slow as incremental disbursements are lower in FY12.
Principal investments remain volatile and difficult to predict (would be challenging
to see meaningful upsides in the current environment).
Infrastructure Development Finance
(IDFC.BO; Rs133.45; 1M)
Valuation
We value IDFC at Rs174 based on our sum-of-the-parts methodology. We value
IDFC's core lending business at Rs142 per share; we prefer a P/BV multiple of 2.0x
1yr-Fwd BV benchmarked towards the lower band of private banks' target P/BV
multiples, given its sub-15% core ROE. This reflects IDFC's premium positioning in
the infrastructure segment, strong management, long track record of low asset risks
and relatively high growth profile. However, its target multiple is constrained by its
lack of retail asset, liability and distribution franchises relative to premier private
bank franchises. We value the asset management business as a percentage of
assets and value this business at Rs9 per share sub-divided into Rs5 for the private
equity segment (7% of AUMs) and Rs4 for the Stanchart AMC business (4% of
AUMs). We value IDFC's broking and investment banking business at Rs5 per
share based on 15x 1yr Fwd profits. Finally, we also add Rs18 for IDFC's
investment portfolio including the NSE (valued in-line with the last reported
transaction).
Risks
We rate IDFC shares Medium Risk, even as our quantitative risk system, which
tracks 260-day historical share price volatility, suggests Low Risk. While IDFC’s
increasing scale and strong asset quality track record, reduce risks, we believe its
mono-segment lending and inherent exposure to capital markets increase its risk
profile. Key downside risks that could restrict the stock from achieving our target
price include: a) Sharp increases in interest rates; b) Significant slowdown in
infrastructure growth and asset quality; c) Continued softness in capital markets for
a relatively longer period; d) Regulatory changes and a higher tax rate.
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