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IDFC (IDFC)
Banks/Financial Institutions
Moderating growth, margins buffer. We believe that IDFC’s loan growth will
moderate to about 25% yoy in FY2012E from 50% in FY2011. Traction in roads will
somewhat offset lower volumes in telecom and power. On the positive side, margins
will likely better expectations and can provide a positive surprise on the back of easing
competitive intensity and lower bulk borrowings rates. We are revising our estimates
and price target to Rs160 (Rs170 earlier), reiterate ADD rating. Post recent correction,
the stock trades at 10.4X PER and 1.4X PBR FY2013E.
Loan growth will be back-ended
IDFC’s loan book will remain somewhat stable for next 1-2 quarters as the investments in
infrastructure have slowed down. The company expects growth to be back-ended in FY2012E.
Rise in interest rates, regulatory uncertainty (resulting in delay for award of projects) and
environmental approvals have affected the pace of growth. We are modeling 22-24% loan
growth over the next two years (25-35% earlier). While capex in power sector moderates, we
expect growth in roads (on a low base) to pick up over the next few quarters.
Better-than-expected scenario for NIM
We are raising our NIM estimates for IDFC by 10-15 bps. We now expect IDFC’s margins to decline
by 10 bps yoy. The decline in spread will be higher at 50 bps yoy in FY2012E; the recent capital
issuance will provide cushions to margins.
The competitive intensity between lenders has eased considerably with the rise in PLR/base rate
by public banks and more specifically SBI. IDFC is now better-placed to pass on rise in lending
rates to its customers.
After a sharp rise, a decline in CP rates over the last few days provides some comfort on the
liability side. While we expect bulk borrowings rates to remain volatile in the near term, this is
the first sign of topping off of interest rates. IDFC has guided for stable yoy spreads unlike a
guidance of declining spreads in the past.
Revising estimates, retain ADD with price target of Rs160
We are revising down our estimates by 4-5% to factor lower loan growth. Higher NIM will
somewhat offset the decline in NII due to lower loan growth. We have also reduced our estimates
for IDFC Capital (SSKI) to factor lower investment banking and broking income. We are revising
our price target to Rs160 (from Rs170 earlier) to factor lower core income. At our price target,
IDFC will trade at 1.8X PBR and 13.5X PER FY2013E.
We value the core business at 1.9X PBR FY2013E for medium-term RoE of about17%.
Core RoEs will, however, remain low at about 15-16% in FY2012E and FY2013E due to
sub-optimal leverage.
We value IDFC AMC at Rs10 bn, i.e. 3.5% of FY2013E AUMs—we are modeling about
15-20% yoy growth in AUMs. Notably, in December 2010, IDFC entered into an
agreement with Natixis to sell 25% stake at a valuation of Rs9.3 bn.
We value IDFC’s alternative funds at about 10% of AUMs. The India Development Fund
(first PE fund) is in the money and hence valued at 25% of AUMs.
IDF—structurally positive; IDFC is well-placed
We believe that IDFC is best-placed to promote/ sponsor infrastructure debt fund (IDFs). The
company has already promoted a project equity fund with a corpus of US$930 mn. Last
week, the Ministry of Finance finalized the structure of IDF. An IDF can be set up as a trust
(as an MF) or as a company (NBFC). Akin to a project equity fund, IDF would refinance
projects that are completed and in operations for one year. The government expects IDFs to
attract long-term funds from pension and insurance companies and can be supported by
external credit enhancement. The regulators (RBI for NBFCs and SEBI for MFs) will likely
release detailed guidelines for IDFs.
Roads sector well-placed at this juncture—key takeaways from KIE infrastructure
conference
The energy sector has driven about half of IDFC’s loan growth in FY2011 while the share of
roads was about 30%. IDFC’s management has highlighted that the traction in the road
sector is relatively stronger and hence, the latter will play a bigger role over the next few
quarters. Notably, during 4QFY11, over 50% of the incremental disbursements were driven
by the transportation sector. Companies, consultants and rating agencies now seem to be
relatively more positive on the road sector though growth may be below Planning
Commission estimates. We highlight some of the takeaways from the KIE Infrastructure
conference hosted in Mumbai last week.
According to IRB, most large projects (>Rs15-20 bn) can earn 16-20% IRRs. Key
assumptions in bidding include (1) traffic growth of about 5-7%, (2) interest rate of 10-
11%, and (3) cost of capital of 12%. IRB and IL&FS would primarily focus on large-sized
projects which have lesser competition—15 odd qualified bidders and 4-5 serious bids.
Further, IL&FS believes that the uniform distribution of awards by NHAI would benefit the
road sector and may lead to saner bidding in future awards.
Smaller projects have seen aggressive bidding. According to IL&FS, promoters have bid
aggressively (at single-digit IRRs) even for annuity projects; projects in the range of Rs3-10
bn have seen as many as 40 players bidding.
Infrastructure companies are not worried about access to bank credit. Slowing credit in
other sectors and enough headroom for growth (before breaching limits) will likely drive
bank funding.
Rating agencies are not much concerned on the road sector as traffic projections in most
projects are in line with their assumptions and most projects on the road front seem to be
on schedule, as of now.
The Government is aiming to augment long-term debt funds for infrastructure through
tax-free bonds, infrastructure debt funds (including credit enhancement) so that pension
funds can invest in infrastructure projects; take out financing scheme of IIFCL. Last week,
the Ministry of Finance announced the structure for infrastructure debt fund (as discussed
above).
Concerns on power sector—key takeaways from KIE infrastructure conference
According to rating agencies, most of the projects in the power sector are in the
moratorium period and hence, there are no large worries on debt servicing as of now.
Even in the medium term, prospective projects which have strong promoter backing
should not face an issue. However, there have been some issues that are not monitored
closely for power projects, which have a higher reliance on merchant power.
Feedback Infrastructure maintained that most of the new linkage-based plants will
manage about 50% of their normative requirement (85% PLF) for the next 2-3 years
from Coal India and would have to resort to coal imports. Further, state electricity boards
would be unwilling to purchase high-cost power (unless operating in scenario of
approaching assembly or general elections) which would render the merchant capacities
running on imported coal an unviable option. The scenario is likely to get worse when the
pace of commissioning gathers momentum.
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