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Risk-reward turns favorable; upgrading to Buy
Healthy fundamentals; multiple re-rating catalysts
IDFC has corrected 17%/23%/37% in the last 3M/6M/12M-period,
underperforming the broader indices by a wide margin. Concerns relating
to slowing growth momentum and possible worsening of asset quality
have impacted stock performance.
However, IDFC’s focused strategy of profitable growth, proven track record
of qualitative growth across cycles, and higher standard asset provisioning
makes it well positioned v/s its peers in the infrastructure financing space.
The stock is trading at historical low valuations. Multiple re-rating catalysts
exist: (1) expected monetary easing, leading to improvement in liquidity
scenario and fall in interest rates, (2) government intervention to address
key issues faced by the Indian Infrastructure sector.
Expect loan growth to pick up; positive surprises likely: Asset growth was muted
in 1HFY12, with loans growing just 4% YTD (14% YoY) – the slowest in the last five
years. However, we expect loan growth to pick up despite the uncertain environment,
given IDFC’s focused strategy to improve wallet share in existing projects. We have
built in 18% loan CAGR (a conservative estimate) over FY12/13. Government
intervention to address some key issues faced by the Indian infrastructure sector
(which is highly likely) could significantly alter the growth outlook for IDFC.
Asset quality risks lower; diversified loan book: IDFC’s loan book is fairly diversified
with its exposure distributed across Energy (43%), Transportation (24%) and Telecom
(22%). Though majority of its portfolio is under the Energy segment, Power Generation
constitutes just 28% of its overall portfolio. Moreover, IDFC’s exposure to power projects
under construction is only 15%. While it has 7% exposure to IPP/Merchant Power,
~60% of the projects it is exposed to have linkage to captive mines. Moreover, factors
like no direct exposure to SEBs, impeccable asset quality track record (with GNPA
at ~20bp), and loan loss reserve of 1.6% provide comfort on the asset quality front.
Spreads back to normalized levels, monetary easing to provide relief: IDFC’s
spreads have returned to normalized levels of 2.2-2.4% from the peak of 2.7%. With
(1) the interest rate cycle nearly peaking out, (2) wholesale rates stabilizing/cooling
off, and (3) increased FII limit/lowering of lock-in period in bonds issued by IFCs
resulting in relatively low cost borrowings, IDFC should be able to maintain a tight
leash on its cost of funds. We expect IDFC to pass on the fall in cost of funds to
borrowers, which will help to gain market share. Spreads are likely to remain stable
at 2.2-2.4% over FY12/13.
Risk-reward favorable; upgrade to Buy: Monetary easing and expected government
intervention to address the key issues faced by the Indian infrastructure sector could
act as major catalysts in improving the growth and profitability outlook for IDFC,
leading to its re-rating. Among the IFCs, IDFC is well poised (compared to peers) to
tide through the current phase of moderation in economic growth. We believe riskreward
is favorable and upgrade our rating to Buy, with an SOTP-based price target of
INR150.
Risk-reward favorable; upgrade to Buy
Monetary easing and expected government intervention to address the key issues faced
by the Indian infrastructure sector could act as major catalysts in improving the growth
and profitability outlook for IDFC, leading to its re-rating. Among the IFCs, IDFC is well
poised (compared to peers) to tide through the current phase of moderation in economic
growth. At 0.9x FY13E BV, the stock is trading near its historical low valuations and
discounts the concerns related to growth and asset quality. We believe risk- reward is
favorable and upgrade our rating to Buy, with an SOTP-based price target of INR150.
Monetary easing expected sooner than later
In CY11, while growth slowed down, inflation was stubbornly high, which led to successive
rate hikes by RBI. Inflation remained above 9% in each of the 11 months of 2011 up to
November 2011 and touched double digits in September 2011. With moderation in food
inflation, slowdown in industrial growth and high base, inflation is likely to decline rapidly
to ~7% by the end of 4QFY12. Our Economist expects inflation to remain range-bound at
5-6% for a large part of FY13. In his view, the growth-inflation balance is tilting in favor
of growth and RBI may effect larger than expected rate cuts soon. The rate cut cycle
could begin as early as January 2012 and RBI is likely to continue with its series of OMOs
aggregating INR860b for FY12, especially in the backdrop of currency intervention draining
out liquidity. Further, depending upon the prevailing liquidity situation, a CRR cut too may
be effected along with rate cuts. In aggregate, our Economist expects RBI to ease rates
by 150bp over CY12/FY13.
RoA to remain healthy; excess capitalization to keep RoE moderate
With RoA expected to remain strong at 2.7%+ due to stable spreads, reducing wage
pressure on capital market business and continued high provisioning on the balance sheet.
One of stake sale in equity business or monetization of carry income may provide surprise
on profitability. However, on back of moderate growth outlook (till policy paralysis persist)
RoE's are likely to remain subdued due to excess capital on the balance sheet. We believe
current valuations factors in the concerns over growth and asset quality and materialization
of key catalysts (as discussed above) will lead to re-rating. At CMP, IDFC trades at 0.9x
FY13E AP/ABV, near its historical low valuations and risk reward remains favourable.
We upgrade our rating on the stock to Buy with a price target of INR150.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Risk-reward turns favorable; upgrading to Buy
Healthy fundamentals; multiple re-rating catalysts
IDFC has corrected 17%/23%/37% in the last 3M/6M/12M-period,
underperforming the broader indices by a wide margin. Concerns relating
to slowing growth momentum and possible worsening of asset quality
have impacted stock performance.
However, IDFC’s focused strategy of profitable growth, proven track record
of qualitative growth across cycles, and higher standard asset provisioning
makes it well positioned v/s its peers in the infrastructure financing space.
The stock is trading at historical low valuations. Multiple re-rating catalysts
exist: (1) expected monetary easing, leading to improvement in liquidity
scenario and fall in interest rates, (2) government intervention to address
key issues faced by the Indian Infrastructure sector.
Expect loan growth to pick up; positive surprises likely: Asset growth was muted
in 1HFY12, with loans growing just 4% YTD (14% YoY) – the slowest in the last five
years. However, we expect loan growth to pick up despite the uncertain environment,
given IDFC’s focused strategy to improve wallet share in existing projects. We have
built in 18% loan CAGR (a conservative estimate) over FY12/13. Government
intervention to address some key issues faced by the Indian infrastructure sector
(which is highly likely) could significantly alter the growth outlook for IDFC.
Asset quality risks lower; diversified loan book: IDFC’s loan book is fairly diversified
with its exposure distributed across Energy (43%), Transportation (24%) and Telecom
(22%). Though majority of its portfolio is under the Energy segment, Power Generation
constitutes just 28% of its overall portfolio. Moreover, IDFC’s exposure to power projects
under construction is only 15%. While it has 7% exposure to IPP/Merchant Power,
~60% of the projects it is exposed to have linkage to captive mines. Moreover, factors
like no direct exposure to SEBs, impeccable asset quality track record (with GNPA
at ~20bp), and loan loss reserve of 1.6% provide comfort on the asset quality front.
Spreads back to normalized levels, monetary easing to provide relief: IDFC’s
spreads have returned to normalized levels of 2.2-2.4% from the peak of 2.7%. With
(1) the interest rate cycle nearly peaking out, (2) wholesale rates stabilizing/cooling
off, and (3) increased FII limit/lowering of lock-in period in bonds issued by IFCs
resulting in relatively low cost borrowings, IDFC should be able to maintain a tight
leash on its cost of funds. We expect IDFC to pass on the fall in cost of funds to
borrowers, which will help to gain market share. Spreads are likely to remain stable
at 2.2-2.4% over FY12/13.
Risk-reward favorable; upgrade to Buy: Monetary easing and expected government
intervention to address the key issues faced by the Indian infrastructure sector could
act as major catalysts in improving the growth and profitability outlook for IDFC,
leading to its re-rating. Among the IFCs, IDFC is well poised (compared to peers) to
tide through the current phase of moderation in economic growth. We believe riskreward
is favorable and upgrade our rating to Buy, with an SOTP-based price target of
INR150.
Risk-reward favorable; upgrade to Buy
Monetary easing and expected government intervention to address the key issues faced
by the Indian infrastructure sector could act as major catalysts in improving the growth
and profitability outlook for IDFC, leading to its re-rating. Among the IFCs, IDFC is well
poised (compared to peers) to tide through the current phase of moderation in economic
growth. At 0.9x FY13E BV, the stock is trading near its historical low valuations and
discounts the concerns related to growth and asset quality. We believe risk- reward is
favorable and upgrade our rating to Buy, with an SOTP-based price target of INR150.
Monetary easing expected sooner than later
In CY11, while growth slowed down, inflation was stubbornly high, which led to successive
rate hikes by RBI. Inflation remained above 9% in each of the 11 months of 2011 up to
November 2011 and touched double digits in September 2011. With moderation in food
inflation, slowdown in industrial growth and high base, inflation is likely to decline rapidly
to ~7% by the end of 4QFY12. Our Economist expects inflation to remain range-bound at
5-6% for a large part of FY13. In his view, the growth-inflation balance is tilting in favor
of growth and RBI may effect larger than expected rate cuts soon. The rate cut cycle
could begin as early as January 2012 and RBI is likely to continue with its series of OMOs
aggregating INR860b for FY12, especially in the backdrop of currency intervention draining
out liquidity. Further, depending upon the prevailing liquidity situation, a CRR cut too may
be effected along with rate cuts. In aggregate, our Economist expects RBI to ease rates
by 150bp over CY12/FY13.
RoA to remain healthy; excess capitalization to keep RoE moderate
With RoA expected to remain strong at 2.7%+ due to stable spreads, reducing wage
pressure on capital market business and continued high provisioning on the balance sheet.
One of stake sale in equity business or monetization of carry income may provide surprise
on profitability. However, on back of moderate growth outlook (till policy paralysis persist)
RoE's are likely to remain subdued due to excess capital on the balance sheet. We believe
current valuations factors in the concerns over growth and asset quality and materialization
of key catalysts (as discussed above) will lead to re-rating. At CMP, IDFC trades at 0.9x
FY13E AP/ABV, near its historical low valuations and risk reward remains favourable.
We upgrade our rating on the stock to Buy with a price target of INR150.
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