IDFC - Slowdown everywhere ::Macquarie Research,

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IDFC
Slowdown everywhere
Event
 Cutting earnings and TP sharply, maintain Neutral: We are cutting our
earnings for IDFC by 7-9% for FY13/14E and reducing our TP by 14% on
account of a lower multiple for the core business. Maintain our neutral stance
on the stock.
Impact
 Slowdown expected and there could be negative surprises also: Though
it’s largely expected and also well articulated by the management that loan
growth is likely to slow down, the current state of impasse at the government
end makes us worry about a sharper than expected slowdown in the
execution and awarding of projects. Our channel checks and conversations
with bank managements indicate that new sanctions for infrastructure projects
in general are down a very significant 70% YoY.
 Other fee income generating businesses are doing very badly:
Investment banking and securities business revenues are down sharply and
profitability has been under severe pressure. A sharp slowdown in sanctions
also doesn’t bode well for fee income growth.
 NPL and restructuring worries: NPL worries are now emanating. Currently
IDFC’s NPL levels are negligible. Restructuring is inevitable and likely to
happen specifically for the private power projects in FY13E. IDFC has close to
30%+ exposure to these. We accordingly expect a sharp increase in credit
costs from 50bps to 80bps in FY13E. If equity markets remain subdued there
could also be investment-related provisions as IDFC does carry a sizeable
equity book.
 Spreads could be under pressure in the near term: IDFC management
itself did admit that after the rate hike of 50bps recently by RBI, spreads are
expected to be under pressure. However much of the compression has
already been witnessed last year and incremental spread compression could
be lower.
Earnings and target price revision
 We cut our FY13E and FY14E earnings by 7% and 9%, respectively, driven by
increased credit costs. We reduce our TP by 14% to Rs120 on account of a
reduction in our core business multiple from 1.5x to 1.3x. The reduction is
mainly on account of lower ROE where we have factored higher credit charges.
Price catalyst
 12-month price target: Rs120.00 based on a Sum of Parts methodology.
 Catalyst: Weak profitability across all businesses from 2QFY12 onwards
Action and recommendation
 Multiple headwinds, would avoid now: IDFC does have several moving
parts to its earnings all of which are facing severe headwinds. We would
revisit our investment thesis 10-15% below current market price.

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