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IDFC
Neutral
IDFC.BO, IDFC IN
Significant challfenges remain
Our 10% cut in PT for IDFC (to Rs140) is led primarily by our ~5-7%
EPS estimate decreases. IDFC’s challenges are mounting – loan growth is
slowing and fees are under all-round pressure. The recent correction has
adjusted valuations downwards, but structural pressure on ROEs renders
historical trading ranges irrelevant, in our view. Maintain Neutral.
Loan growth under increasing pressure: Our FY12 loan growth
decrease (25% to 22%) is based on: a) management’s public statements
of a “20-25% FY12 growth” compared to the previous “doubling in
three years”; b) anecdotal evidence of tardy progress in projects and
approvals due to lack of feedstock and land; and c) high capital costs
(both debt and equity) which is affecting the bankability of projects.
Fee businesses struggling: IDFC’s investment banking and AMC subs
are struggling in a weak market environment. Loan origination fees are
likely to be hit by slowing growth, and prop book profits/carry income
streams tend to trend down in weak markets. We expect a contraction in
fees y/y, leading to pressure on ROAs.
ROEs stuck in low-teens: IDFC’s ROE downtrend from 17.8% in
FY07 to a low-teen rate now will not be significantly reversed, in our
view. Short-term improvement from better leverage is likely to be
capped by a structural decline in fees/investment profits and a cap on
leverage given its lumpy asset exposures. We think it will remain
confined to a ~13-14% zone.
IDFC has sharply corrected recently (down 16% in three months) but that
has been accompanied by what we see as worsening fundamentals. The
apparent cheapness – 1.6x FY12E P/BV and 13x FY12 P/E – is
accompanied by low earnings and pressure on growth. We believe that
only a significant improvement in the environment (lower rates, improved
markets) would act as a trigger – we maintain Neutral.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IDFC
Neutral
IDFC.BO, IDFC IN
Significant challfenges remain
Our 10% cut in PT for IDFC (to Rs140) is led primarily by our ~5-7%
EPS estimate decreases. IDFC’s challenges are mounting – loan growth is
slowing and fees are under all-round pressure. The recent correction has
adjusted valuations downwards, but structural pressure on ROEs renders
historical trading ranges irrelevant, in our view. Maintain Neutral.
Loan growth under increasing pressure: Our FY12 loan growth
decrease (25% to 22%) is based on: a) management’s public statements
of a “20-25% FY12 growth” compared to the previous “doubling in
three years”; b) anecdotal evidence of tardy progress in projects and
approvals due to lack of feedstock and land; and c) high capital costs
(both debt and equity) which is affecting the bankability of projects.
Fee businesses struggling: IDFC’s investment banking and AMC subs
are struggling in a weak market environment. Loan origination fees are
likely to be hit by slowing growth, and prop book profits/carry income
streams tend to trend down in weak markets. We expect a contraction in
fees y/y, leading to pressure on ROAs.
ROEs stuck in low-teens: IDFC’s ROE downtrend from 17.8% in
FY07 to a low-teen rate now will not be significantly reversed, in our
view. Short-term improvement from better leverage is likely to be
capped by a structural decline in fees/investment profits and a cap on
leverage given its lumpy asset exposures. We think it will remain
confined to a ~13-14% zone.
IDFC has sharply corrected recently (down 16% in three months) but that
has been accompanied by what we see as worsening fundamentals. The
apparent cheapness – 1.6x FY12E P/BV and 13x FY12 P/E – is
accompanied by low earnings and pressure on growth. We believe that
only a significant improvement in the environment (lower rates, improved
markets) would act as a trigger – we maintain Neutral.
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