India Infoline (IIFL) -Stock reaction sharp, earnings impact limited- Kotak Sec

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India Infoline (IIFL)
Banks/Financial Institutions
Stock reaction sharp, earnings impact limited. India Infoline’s stock has corrected
significantly in the past three days after Money Matters Financial Services (MM), its
investment banking client, was implicated by the CBI in a housing loan scam. We don’t
expect the event to have any significant impact on IIFL’s overall business. The
management has highlighted that it has not had any transactions with MM before the
QIP. Rising cash market volumes, income from IPO funding and investment banking are
likely to boost the earnings of brokerages in the current environment. Retain BUY.




India Infoline was lead manager for the QIP of Money Matters Financial Services
We don’t expect material impact on India Infoline’s earnings from the alleged involvement of
Money Matters Financial Services (MM) in a housing loan scam. Last week, the Central Bureau of
Investigation (CBI) has arrested the senior management of MM for their alleged involvement in
bribery and major housing loan. MM has recently concluded its QIP for which IIFL was the lead
manager.

Management has denied any transactions with Money Matters Financial Services (before the QIP)
IIFL’s management has highlighted that the company has not had any transactions with MM prior
to the QIP. They have relied on the information disclosed by the management and auditors (in line
with the regulatory requirements) and hence do not expect any regulatory risk on this account. We
believe that the deal will temper the franchisee of IIFL in the institutional segment to some extent.

We believe that volumes near-term business traction remains strong
Equity broking business remains the key business driver for India Infoline and contributes about
60% of its PBIT. Cash market volumes have moved up 14% mom in August 2010, 8% mom in
September 2010 and further 8% in October 2010. We expect the trend to remain strong. We are
factoring 10% qoq growth for 3QFY11 despite assuming a decline in volumes in December- in line
with annual trend. IIFL’s market share has been stable and somewhat lower traction in the
institutional segment, on the back of MM’s QIP, is a risk.


Insurance distribution business—impact of regulatory changes, management
more positive
IIFL’s management has guided for stable revenues from this segment despite a significant
change in broking commissions post September 2010 (implementation of new IRDA
guidelines). According to the management, higher volumes and better productivity will likely
offset a decline in commission rates. We believe productivity will eventually improve though
it is challenging to project near-term volumes. We are modeling a 33% yoy decline in this
segment during 2HFY11. Notably, APE collections for the private sector were down 40% in
October 2010 (the first complete month in the new regulatory regime); APE trends will likely
pick up over the next few months as distributors get more comfortable with the new
product portfolio.

NBFC business—growing gradually, low NPLs
IIFL reported loan book of Rs25 bn up from Rs20 bn in 1QFY11 and about Rs12 bn in
2QFY10. Home loans and margin funding dominate IIFL’s loan book. The management has
highlighted that the company has about 1% net NPL as on September 2010. The company
does not have transactions with MM before the QIP and its loan book does not have any
exposure to the companies currently investigated by CBI in regard to housing scam.

Mortgages (includes builder loans) contributes to about 43% of the loan book while loan
against shares and margin funding are about 55%. All loans to developers are current
(performing). The company has about 200% coverage on loans against shares.
IIFL is also engaged in IPO funding, a buoyant primary market provides significant episodic
opportunities to the company. We expect growth momentum in this business to continue
given its low base, improvement in the retail lending scenario and supported by low
capitalization levels. According to market sources, large retail issues like Coal India attracted
significant IPO funding (as reflected by 25X oversubscription in the HNI category).

Operating expenses at some risk
IIFL’s cost to income ratio declined to 60% in 2QFY11. Rise in employee expenses due to
competitive pressures in the broking business remains a key risk to our estimates.
Management has denied rumors of senior management exit in the institutional team.

Revising estimates, retain BUY with price target of Rs130 (from Rs150 earlier)
We are reducing our earnings estimates by 3-4% to factor lower income from institutional
segment. With limited impact of the Money Matters deal and improving growth traction, we
believe the stock is placed attractively 9X PER and 1.2X PBR FY2012E. Retain BUY.