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Raise PO on very strong 2Q
earnings; Buy
Raise PO to Rs240; momentum turning positive
We raise our PO to Rs240 post IBFSL’s strong 2QFY11 earnings (+30% ahead),
driven by very strong topline growth. We believe the stock can trade up to +1.5-
1.6x FY12E adj. book (trades at 1.2x FY12E) given 1) earnings growth of
+90/32% over FY11E/12E; 2) RoEs doubling to +16.0% in FY12E vs. <8% in
FY10, RoAs improving to +3.0% vs. 2.7% in FY10 and; 3) asset quality
manageable (net <0.5%). More importantly, we think IFSL’s strategy of moving
towards ‘housing finance’ like biz. model will improve its risk-profile. Our PO
implies target P/E of <9.5x.
2Q11 earnings +30% ahead; vol. & disb. momentum strong
IBFSL’s 2QFY11 earnings of +Rs1.7bn came in +30% ahead of estimates driven
by +85% yoy volume growth (71% mortgage) but estimated spreads are down
100bps yoy to 6.6% due to changing loan book profile. More importantly, there
has been a visible rise in disbursements (at Rs48bn vs. Rs32bn in 1QFY11 and
Rs9.4bn in 1QFY10). Asset quality remains under check and has been improving
steadily over the last four quarters, Gross down 24% qoq (at 1.4%) and net down
39% qoq (at 0.6%). Fee income up +45% qoq on faster disbursement growth.
Raise earnings by 24% each for FY11E/12E; +90/32% growth
We have raised our earnings estimates by 24% for FY11/12 owing to very strong
earnings in 2QFY11. We forecast earnings growth of +90% in FY11 and +32% in
FY12, as IFSL leverages equity. Earnings growth to be driven by volume growth
of +70/45% in FY11E/12E and declining credit costs and operating efficiency.
Strategy to move to ‘HFC’ type model
While IFSL’s strategy of moving to an ‘HFC’ type model would bring down its
margins in the medium-term, they should be compensated with higher volumes,
lower credit costs and lower cost-income ratios.
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