Long term play, demerger beneficial to shareholders • IDFC:: ICICI Securities PDF link

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Long term play, demerger beneficial to shareholders
• IDFC’s Q2FY15 PAT of | 421 crore came below our estimate of | 471
crore mainly due to higher provisions and supported by strong non
interest income
• Higher principal gains of | 286 crore (from sale of real estate
investments) led to other income surging 122% YoY to | 453 crore
• Gross loan growth came in lower than estimate declining 2% YoY vs.
estimated 1% dip to | 54851 crore. NII, accordingly, de-grew 5% YoY
to | 648 crore with NIM declining 20 bps to 3.8% vs. 4% QoQ
• Asset quality was maintained sequentially at 0.62% GNPA and 0.42%
NNPA. The restructured book rose 80 bps to 6.1% vs. 5.3%
• IDFC raised capital of | 1000 crore at | 127/share placing to domestic
institutions only, towards the end of September quarter to benefit for
future. As a result, CAR improved to 25.8% vs. 23.5% QoQ while
foreign ownership reduced to 48.8% vs. 53.7% in March 2014
Aggressive growth not seen ahead, diversification expected in loan book
Currently, 85% of its loan book of | 54851 crore is in infrastructure with
43% in energy, 24% in transport and 19% in telecom. The book has
grown at 33% CAGR over FY09-12. Post that the loan book grew 10%
average. Over the next 12 months, by when the bank will be launched,
IDFC is not expected to grow its balance sheet significantly. We expect
loan growth to be flat by FY16E with diversified assets getting in. In FY16,
the bank will have been formed for part of the year but we have estimated
on the basis of NBFC as no data on transfer amounts known.
Treasury book growing fast to | 17885 crore, mainly depicts build-up of
SLR ratio for the bank with share in B/S rising to 23% vs. 11% in Q2FY14.
Announced demerger, IDFC shareholder to receive 1 share in IDFC Bank
1. It received board approval to demerge its financial undertaking
into a wholly-owned step-down subsidiary IDFC Bank Ltd. Each
shareholder of IDFC Ltd will receive one share of IDFC Bank for
each share of IDFC Ltd held by them and the same to be listed
2. All financially regulated businesses will be owned by NoFHC
namely IDFC Financial Holding Company, yet to be formed. (AMC,
alternatives and securities to be transferred apart from bank)
3. NoFHC will hold 53% of the bank with the balance 47% being
held by current IDFC shareholders
4. Infrastructure Development Fund (IDF) to be created and certain
portion of infra loans to be transferred post clarification from RBI
5. The bank will be listed on day one of operation – under demerger
route, IDFC parent shareholder will receive IDFC Bank shares.
Shareholders own NoFHC indirectly via parent IDFC Ltd
Return ratios now estimated to be >12%, in first year itself as a bank
As against earlier expectation of RoE contracting from current 13-14% to
single digits in the first two years of conversion to a bank, we believe RoE
will stay >12% in initial years. Also, RoA, which was likely to decline to
1.3% from current 2.5%, can stay above 2% with lower stress of priority
sector on infra loans. RBI notification on exemption to banks from CRR,
SLR and PSL on infrastructure loans (funded by long term infra bonds)
has come as a boon to IDFC. We believe the current market price still
offers an opportunity to play long term (three to five years) for strong
returns based on benefits accruing to IDFC on infrastructure push norms
from the RBI. We maintain our SoTP target price to | 174 valuing at 1.5x
FY16E ABV and recommend BUY

LINK
http://content.icicidirect.com/mailimages/IDirect_IDFC_Q2FY15.pdf