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Growth slows, but quality intact
For 1QFY12, IDFC’s consolidated profit of Rs3.1bn (down 6% YoY) was
below our estimates due to loss on investments and lower fees. Lending
activity has slowed, but management expects a pick-up in 2H. While loan
growth moderated to 30%, spreads seem to have expanded QoQ (stable
on reported basis) and asset quality was intact- both are encouraging.
While near-term environment is challenging, IDFC with a diversified loan
mix and high capitalisation is best play on revival of investment outlook in
infrastructure sector and ease in liquidity conditions. Maintain BUY.
Business growth slows, but…
The slowdown in IDFC’s lending operations during 1Q is due to a combination
of slowdown in new projects and IDFC’s higher funding costs that make it
difficult to compete with banks. Therefore, the easing liquidity situation will
play a key role in improving IDFC’s competitive position. During 1Q, approvals
and disbursals were low, but the +50% YoY decline is from a high base; loan
growth moderated from 50% YoY in Mar-11 to 30%. IDFC expects 15-20%
loan growth in FY12, but disbursements will be back-ended.
… spreads expand sequentially and…
On the positive side, spreads seem to have expanded on a QoQ basis in spite
of tight liquidity and rise in borrowing costs; however reported spreads (on
12m rolling basis) were stable at 2.2%. Management sees marginal risk to
spreads from current levels in spite of recent hike in policy rate by RBI.
… stable asset quality will abate concerns
Asset quality was stable with gross and net NPLs flat QoQ/ YoY and IDFC sees
limited risk to its asset quality from here. This should abate concerns on risks
to IDFC’s portfolio as some PSU banks had reported stress in this sector.
Moreover, IDFC’s conservative provisioning policy and higher coverage ratio
(8x of gross NPLs) should cushion earnings against the risk of slippages.
Fees and other income disappoint
IDFC reported marginal loss on sale of investments (27% of PBT in 1QFY11)
and 30% YoY decline in core fees; IB and broking fees also declined sharply.
While growth in core fees will be contingent up on pick-up in disbursals, we
could see higher profit on investments when sale of stake in IDFC AMC is
consummated (FIPB and SEBI have approved sale of 25% stake to Natixis).
Maintain BUY
Over FY11-14, we expect loan Cagr of 26% to drive earnings Cagr of 23%.
IDFC trades at +30% discount to average valuations and with its diversified
loan mix it would benefit from pick-up in investments and fall in interest rates.
Our price target of Rs190 is based on based on 2x FY13CL adjusted PB. BUY.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Growth slows, but quality intact
For 1QFY12, IDFC’s consolidated profit of Rs3.1bn (down 6% YoY) was
below our estimates due to loss on investments and lower fees. Lending
activity has slowed, but management expects a pick-up in 2H. While loan
growth moderated to 30%, spreads seem to have expanded QoQ (stable
on reported basis) and asset quality was intact- both are encouraging.
While near-term environment is challenging, IDFC with a diversified loan
mix and high capitalisation is best play on revival of investment outlook in
infrastructure sector and ease in liquidity conditions. Maintain BUY.
Business growth slows, but…
The slowdown in IDFC’s lending operations during 1Q is due to a combination
of slowdown in new projects and IDFC’s higher funding costs that make it
difficult to compete with banks. Therefore, the easing liquidity situation will
play a key role in improving IDFC’s competitive position. During 1Q, approvals
and disbursals were low, but the +50% YoY decline is from a high base; loan
growth moderated from 50% YoY in Mar-11 to 30%. IDFC expects 15-20%
loan growth in FY12, but disbursements will be back-ended.
… spreads expand sequentially and…
On the positive side, spreads seem to have expanded on a QoQ basis in spite
of tight liquidity and rise in borrowing costs; however reported spreads (on
12m rolling basis) were stable at 2.2%. Management sees marginal risk to
spreads from current levels in spite of recent hike in policy rate by RBI.
… stable asset quality will abate concerns
Asset quality was stable with gross and net NPLs flat QoQ/ YoY and IDFC sees
limited risk to its asset quality from here. This should abate concerns on risks
to IDFC’s portfolio as some PSU banks had reported stress in this sector.
Moreover, IDFC’s conservative provisioning policy and higher coverage ratio
(8x of gross NPLs) should cushion earnings against the risk of slippages.
Fees and other income disappoint
IDFC reported marginal loss on sale of investments (27% of PBT in 1QFY11)
and 30% YoY decline in core fees; IB and broking fees also declined sharply.
While growth in core fees will be contingent up on pick-up in disbursals, we
could see higher profit on investments when sale of stake in IDFC AMC is
consummated (FIPB and SEBI have approved sale of 25% stake to Natixis).
Maintain BUY
Over FY11-14, we expect loan Cagr of 26% to drive earnings Cagr of 23%.
IDFC trades at +30% discount to average valuations and with its diversified
loan mix it would benefit from pick-up in investments and fall in interest rates.
Our price target of Rs190 is based on based on 2x FY13CL adjusted PB. BUY.
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