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India Infoline (IIFL)
Banks/Financial Institutions
Business outlook remains weak, retain SELL. We believe that subdued equity market
volumes will continue to put pressure on India Infoline’s earnings over the next few
quarters. Near-term profitability in the NBFC business will remain subdued due to
pressure on margins and higher expenses (including investments in the gold-loan
business). The insurance business continues to demonstrate stable earnings defying
macro industry trends. We cut estimates; retain SELL with price target of Rs70.
Challenging times for broking business, qoq performance stable
India Infoline (IIFL) reported broking and related income of Rs1.3 bn (stable qoq). Equity broking
income (as per our estimates) declined marginally qoq even as the traction in the commodities
broking improved qoq. While IIFL’s broking volumes were stable qoq, commission yield was likely
lower.
We expect IIFL to report 23% yoy decline in broking commission income in FY2012E on the back
of about 24% decline in broking volumes in the cash equities segment. Higher- or lower-thanexpected
movement in stock markets and volumes can significantly impact earnings from this
segment.
Overall volumes in cash markets have declined by 22% yoy in 1QFY12 and 28% in 2QFY12.
The cash market volumes seem to have stabilized at Rs135-140 bn/day as compared to mom
improvement reported in 2QFY12.
Multiple risks to business, retain SELL
We find multiple challenges for IIFL’s earnings.
Equity broking business subdued. Equity market volumes have been subdued for the past
couple of months and will likely remain weak (as discussed above).
Overhang of regulatory impact. The impact of regulatory changes in the insurance sector is
not yet reflected in the income from insurance distribution. IIFL has demonstrated stable
revenues from distribution business for the past 6-7 quarters even as premium collections have
been volatile; in 2QFY12 premium collections increased 25% qoq. We are modeling stable
income for next two quarters as well even as the traction in the business typically picks up in
the 2H.
Lower RoE in NBFC business. The NBFC business is growing rapidly but continues to
operate below optimal leverage levels. Operating expenses will likely remain high due to
expansion of the gold-loan business; IIFL has set up about 500 branches in the past two
quarters, taking the total branch network to about 900. The company reported about 6%
RoE in FY2011; we expect RoEs at suboptimal levels over the next two years. The
management has guided for slower pace of expansion in the gold-loan business over the
next two quarters.
Revision in estimates, retain SELL
We are revising down our estimates to factor lower income from broking and finance
business (see Exhibit for details on estimate changes). We are modeling cost-to-income ratio
of 58-60% from 59-61% reported in the past two years. Consequently, our EPS for
FY2012E and FY2013E declines to Rs3.5 and Rs5.0.
Our price target of Rs70 factors (1) NBFC business at 1X PBR FY2013E and (2) other
businesses at 10X PER FY2013E. On a consolidated basis, the stock will trade at 1.1X PBR
FY2013E for RoE of 10-11%.
Finance business—loan growth on track, expenses high
IIFL reported loan book of Rs50 bn in September 2011, up from Rs39 bn in June 2011.
Average loan book for the quarter was up 100% yoy while net interest income increased by
40% yoy. Gold loans were the largest contributor to growth (70% of qoq growth in loan
book) followed by mortgages. The company is now focusing on gold loans (in addition to
other business) and has set up over 900 branches for the same; the business will likely
support yields over the medium term but operating cost will remain high in the initial phase.
The management has guided for better revenue traction from the finance business over the
next few quarters as NIMs improve due to reduction in bulk borrowings rates and
investments in the gold-loan business moderates. Going forward, we are modeling loan
book of Rs60 bn and Rs70 bn in FY2012E and FY2013E.
Key highlights of the 2QFY12 results
PAT was down 59% yoy to Rs220 mn, 4% above estimates.
Income was up 21% yoy, largely on the back of growth in interest income.
Net interest income was up 40% yoy.
Operating expenses ratio was stable at 61% qoq, down from 64% in 2QFY11.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Infoline (IIFL)
Banks/Financial Institutions
Business outlook remains weak, retain SELL. We believe that subdued equity market
volumes will continue to put pressure on India Infoline’s earnings over the next few
quarters. Near-term profitability in the NBFC business will remain subdued due to
pressure on margins and higher expenses (including investments in the gold-loan
business). The insurance business continues to demonstrate stable earnings defying
macro industry trends. We cut estimates; retain SELL with price target of Rs70.
Challenging times for broking business, qoq performance stable
India Infoline (IIFL) reported broking and related income of Rs1.3 bn (stable qoq). Equity broking
income (as per our estimates) declined marginally qoq even as the traction in the commodities
broking improved qoq. While IIFL’s broking volumes were stable qoq, commission yield was likely
lower.
We expect IIFL to report 23% yoy decline in broking commission income in FY2012E on the back
of about 24% decline in broking volumes in the cash equities segment. Higher- or lower-thanexpected
movement in stock markets and volumes can significantly impact earnings from this
segment.
Overall volumes in cash markets have declined by 22% yoy in 1QFY12 and 28% in 2QFY12.
The cash market volumes seem to have stabilized at Rs135-140 bn/day as compared to mom
improvement reported in 2QFY12.
Multiple risks to business, retain SELL
We find multiple challenges for IIFL’s earnings.
Equity broking business subdued. Equity market volumes have been subdued for the past
couple of months and will likely remain weak (as discussed above).
Overhang of regulatory impact. The impact of regulatory changes in the insurance sector is
not yet reflected in the income from insurance distribution. IIFL has demonstrated stable
revenues from distribution business for the past 6-7 quarters even as premium collections have
been volatile; in 2QFY12 premium collections increased 25% qoq. We are modeling stable
income for next two quarters as well even as the traction in the business typically picks up in
the 2H.
Lower RoE in NBFC business. The NBFC business is growing rapidly but continues to
operate below optimal leverage levels. Operating expenses will likely remain high due to
expansion of the gold-loan business; IIFL has set up about 500 branches in the past two
quarters, taking the total branch network to about 900. The company reported about 6%
RoE in FY2011; we expect RoEs at suboptimal levels over the next two years. The
management has guided for slower pace of expansion in the gold-loan business over the
next two quarters.
Revision in estimates, retain SELL
We are revising down our estimates to factor lower income from broking and finance
business (see Exhibit for details on estimate changes). We are modeling cost-to-income ratio
of 58-60% from 59-61% reported in the past two years. Consequently, our EPS for
FY2012E and FY2013E declines to Rs3.5 and Rs5.0.
Our price target of Rs70 factors (1) NBFC business at 1X PBR FY2013E and (2) other
businesses at 10X PER FY2013E. On a consolidated basis, the stock will trade at 1.1X PBR
FY2013E for RoE of 10-11%.
Finance business—loan growth on track, expenses high
IIFL reported loan book of Rs50 bn in September 2011, up from Rs39 bn in June 2011.
Average loan book for the quarter was up 100% yoy while net interest income increased by
40% yoy. Gold loans were the largest contributor to growth (70% of qoq growth in loan
book) followed by mortgages. The company is now focusing on gold loans (in addition to
other business) and has set up over 900 branches for the same; the business will likely
support yields over the medium term but operating cost will remain high in the initial phase.
The management has guided for better revenue traction from the finance business over the
next few quarters as NIMs improve due to reduction in bulk borrowings rates and
investments in the gold-loan business moderates. Going forward, we are modeling loan
book of Rs60 bn and Rs70 bn in FY2012E and FY2013E.
Key highlights of the 2QFY12 results
PAT was down 59% yoy to Rs220 mn, 4% above estimates.
Income was up 21% yoy, largely on the back of growth in interest income.
Net interest income was up 40% yoy.
Operating expenses ratio was stable at 61% qoq, down from 64% in 2QFY11.
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