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Action: Initiate with a Neutral and a TP of INR140
We like IDFC’s strong fundamentals and robust balance sheet with high
capital adequacy. However, we expect IDFC’s balance sheet expansion to
be sluggish until better policy clarity emerges on its core growth sectors
like power and roads. In our view, current valuations fairly balance the
risks and rewards.
Expect moderation in loan book growth, fee income for FY12F
We estimate IDFC to slow down its loan book growth to 15.4% for FY12F
from 50.4% in FY11 and then inch back to 19.5-20% for FY13F. We also
expect declines in i-banking and broking income for FY12F, while we are
factoring modest growth in AMC fees.
Power sector overhang to stay despite robust asset quality profile
We expect IDFC to be able to maintain spreads of c.2.2% and GNPL
below 30bps until FY13F. However, we estimate credit costs to inch up to
85-90bps by FY13F from 70bps in FY11 on the increasing possibility of
restructuring of loans to upcoming power projects. We believe the current
policy inaction on fuel linkage issue will weigh on the stock in the medium
term.
Valuation: IDFC currently trades at 1.5x our FY13F ABV of INR81.91 and
11.2x FY13F EPS of INR10.82. At our TP of INR140, IDFC will trade at
1.7x our FY13F ABV and 13x FY13F EPS of INR10.82 for an FY13F RoE
of 14.5%.
Catalysts: Accelerated monetary policy easing, policy action on coal
linkage front and traction in fee income.
Valuation
Initiate with Neutral; TP of INR140
We estimate IDFC Ltd’s loan book to expand at a CAGR of 17% over FY11-13F. We
expect this to drive a revenue and PAT CAGR of 22% and 21%, respectively, over this
period after factoring in flat margins of 2.2%. We expect IDFC to clock ROA and adjusted
ROE of 2.82% and 14.5%, respectively, for FY13F. IDFC currently trades at 1.5x FY13F
ABV of INR91.03, 1x standard deviation below its historical mean of 2.6x one-year
forward ABV. At our TP of INR140, the implied P/ABV for FY13F is 1.7x. We have
arrived at our target price of INR140 using a three-stage residual-income valuation
method that uses the following assumptions:
• We estimate loan book growth of 15.4% and 19.5% for FY12F and FY13F,
respectively, vs management’s guidance of 15-20% over FY12-13F.
• We expect fee income to decline by 1.5% in FY12F and grow by 30.5% in FY13F.
• We expect core spreads to stay flat at 2.2% in each of FY12F and FY13F (was 2.2% in
1QFY12). Management has indicated that 2.2-2.3% is a sustainable range for interest
spreads.
• On the bad loan front, we are building in increases in GNPLs to INR1.5bn (0.29% of
loan book) by FY13F from INR797mn in FY11. We also assume NNPLs would increase
to INR520mn for FY13F from INR389mn in FY11 with corresponding P&L provisions of
INR989mn and INR408mn, respectively.
• IDFC currently has a capital adequacy ratio of 24% with about 21.46% in tier-1. We are
not building any dilution from capital raising into our model.
• We expect the cost-income ratio to be at 19.2% in FY13F vs. 20.7% in F11. We expect
the cost-asset ratio to drop to 1.04% for FY13F from 1.11% in FY11.
• We expect a pro forma diluted EPS of INR9.38 for FY12F and INR10.82 for FY13F.
Our target price of INR140 implies 2.7x our FY13F ABV (ROE of 14.5% for FY13F) and
12.8x our FY13F EPS.
Key catalysts: Accelerated monetary policy easing, policy intervention to resolve power
sector bottlenecks like fuel availability and SEB (State Electricity Board) financial health
are the key upside catalysts.
Key risks: RBI persisting with a tight money policy, policy logjam with respect power
sector bottlenecks and continued global macro uncertainty.
Residual income valuation
We have built in the following assumptions into our three-stage residual-income model:
• We expect IDFC to post a 19.9% CAGR for its average interest-earning assets over
FY11-14F, compared to an industry average of 17%, on our numbers. We expect this
to be followed by a CAGR of 13% in FY14F-20F and a terminal growth rate of 4%
beyond that.
• We have modelled for an average ROE of 15.5% over FY12-20Fand a 16% terminal
value ROE. Our discount rates range from 14.25% (current cost of equity) for FY11-
14F, 12% for FY14F-20F and a 10% terminal rate.
• We have factored in capital addition of INR6.4bn in 4QFY12 on account of conversion
of 84mn outstanding compulsorily convertible cumulative preference shares to equity
shares at INR176 per share.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Action: Initiate with a Neutral and a TP of INR140
We like IDFC’s strong fundamentals and robust balance sheet with high
capital adequacy. However, we expect IDFC’s balance sheet expansion to
be sluggish until better policy clarity emerges on its core growth sectors
like power and roads. In our view, current valuations fairly balance the
risks and rewards.
Expect moderation in loan book growth, fee income for FY12F
We estimate IDFC to slow down its loan book growth to 15.4% for FY12F
from 50.4% in FY11 and then inch back to 19.5-20% for FY13F. We also
expect declines in i-banking and broking income for FY12F, while we are
factoring modest growth in AMC fees.
Power sector overhang to stay despite robust asset quality profile
We expect IDFC to be able to maintain spreads of c.2.2% and GNPL
below 30bps until FY13F. However, we estimate credit costs to inch up to
85-90bps by FY13F from 70bps in FY11 on the increasing possibility of
restructuring of loans to upcoming power projects. We believe the current
policy inaction on fuel linkage issue will weigh on the stock in the medium
term.
Valuation: IDFC currently trades at 1.5x our FY13F ABV of INR81.91 and
11.2x FY13F EPS of INR10.82. At our TP of INR140, IDFC will trade at
1.7x our FY13F ABV and 13x FY13F EPS of INR10.82 for an FY13F RoE
of 14.5%.
Catalysts: Accelerated monetary policy easing, policy action on coal
linkage front and traction in fee income.
Valuation
Initiate with Neutral; TP of INR140
We estimate IDFC Ltd’s loan book to expand at a CAGR of 17% over FY11-13F. We
expect this to drive a revenue and PAT CAGR of 22% and 21%, respectively, over this
period after factoring in flat margins of 2.2%. We expect IDFC to clock ROA and adjusted
ROE of 2.82% and 14.5%, respectively, for FY13F. IDFC currently trades at 1.5x FY13F
ABV of INR91.03, 1x standard deviation below its historical mean of 2.6x one-year
forward ABV. At our TP of INR140, the implied P/ABV for FY13F is 1.7x. We have
arrived at our target price of INR140 using a three-stage residual-income valuation
method that uses the following assumptions:
• We estimate loan book growth of 15.4% and 19.5% for FY12F and FY13F,
respectively, vs management’s guidance of 15-20% over FY12-13F.
• We expect fee income to decline by 1.5% in FY12F and grow by 30.5% in FY13F.
• We expect core spreads to stay flat at 2.2% in each of FY12F and FY13F (was 2.2% in
1QFY12). Management has indicated that 2.2-2.3% is a sustainable range for interest
spreads.
• On the bad loan front, we are building in increases in GNPLs to INR1.5bn (0.29% of
loan book) by FY13F from INR797mn in FY11. We also assume NNPLs would increase
to INR520mn for FY13F from INR389mn in FY11 with corresponding P&L provisions of
INR989mn and INR408mn, respectively.
• IDFC currently has a capital adequacy ratio of 24% with about 21.46% in tier-1. We are
not building any dilution from capital raising into our model.
• We expect the cost-income ratio to be at 19.2% in FY13F vs. 20.7% in F11. We expect
the cost-asset ratio to drop to 1.04% for FY13F from 1.11% in FY11.
• We expect a pro forma diluted EPS of INR9.38 for FY12F and INR10.82 for FY13F.
Our target price of INR140 implies 2.7x our FY13F ABV (ROE of 14.5% for FY13F) and
12.8x our FY13F EPS.
Key catalysts: Accelerated monetary policy easing, policy intervention to resolve power
sector bottlenecks like fuel availability and SEB (State Electricity Board) financial health
are the key upside catalysts.
Key risks: RBI persisting with a tight money policy, policy logjam with respect power
sector bottlenecks and continued global macro uncertainty.
Residual income valuation
We have built in the following assumptions into our three-stage residual-income model:
• We expect IDFC to post a 19.9% CAGR for its average interest-earning assets over
FY11-14F, compared to an industry average of 17%, on our numbers. We expect this
to be followed by a CAGR of 13% in FY14F-20F and a terminal growth rate of 4%
beyond that.
• We have modelled for an average ROE of 15.5% over FY12-20Fand a 16% terminal
value ROE. Our discount rates range from 14.25% (current cost of equity) for FY11-
14F, 12% for FY14F-20F and a 10% terminal rate.
• We have factored in capital addition of INR6.4bn in 4QFY12 on account of conversion
of 84mn outstanding compulsorily convertible cumulative preference shares to equity
shares at INR176 per share.
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