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IDFC Neutral
IDFC.BO, IDFC IN
1Q12 Concall: Trading growth for ROAs
IDFC management lowered its loan growth targets on today’s call, with a
focus on improved ROAs. The weak policy environment, especially for
thermal power projects, was the key driver of this change – substantial
changes to monetary policy and/or acceleration in power project
implementation could change the scenario. We maintain Neutral. Key
highlights from the call:
Challenges to loan growth: IDFC is targeting 15% loan growth for
FY12 (vs 30% earlier, JPMe 22%), and its Rs 1 tn target for FY14 is
also threatened. A weak financing and policy environment for thermal
projects is the key driver of the slowdown.
Targeting higher ROA: The lower growth targets would be
accompanied by higher ROA focus – incremental loans would be at
improved spreads (by adding risk) and larger fee opportunities. IDFC
will also focus on harvesting investments for some principal book
profits.
Asset quality – cautious confidence: Management remains confident
that its power loan book would remain pristine on asset quality, but did
not rule out some restructuring in the medium term.
Remains challenged, not all in the price: We think IDFC remains
challenged both cyclically and structurally. Cyclically, high rates and the
policy challenges should dissipate in a 1-2 year time-frame and start to
unlock growth opportunities – we think the next 6-12m will be difficult,
however. Structurally, non-interest income will likely lag loan growth
(when the trend rate of 25-30% is restored) and we expect it to be a longterm
ROA/ROE depressant. We believe IDFC is, thus, stuck in 14-15%
long-term potential ROE zone.
These challenges underpin our cautious stance on IDFC, despite the PB
(1.6x FY12) falling to 1sd below mean. We see cyclical issues persisting in
the medium term, and the structural issues do not seem fully recognized by
consensus. Maintain Neutral –we see little upside in the medium term.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IDFC Neutral
IDFC.BO, IDFC IN
1Q12 Concall: Trading growth for ROAs
IDFC management lowered its loan growth targets on today’s call, with a
focus on improved ROAs. The weak policy environment, especially for
thermal power projects, was the key driver of this change – substantial
changes to monetary policy and/or acceleration in power project
implementation could change the scenario. We maintain Neutral. Key
highlights from the call:
Challenges to loan growth: IDFC is targeting 15% loan growth for
FY12 (vs 30% earlier, JPMe 22%), and its Rs 1 tn target for FY14 is
also threatened. A weak financing and policy environment for thermal
projects is the key driver of the slowdown.
Targeting higher ROA: The lower growth targets would be
accompanied by higher ROA focus – incremental loans would be at
improved spreads (by adding risk) and larger fee opportunities. IDFC
will also focus on harvesting investments for some principal book
profits.
Asset quality – cautious confidence: Management remains confident
that its power loan book would remain pristine on asset quality, but did
not rule out some restructuring in the medium term.
Remains challenged, not all in the price: We think IDFC remains
challenged both cyclically and structurally. Cyclically, high rates and the
policy challenges should dissipate in a 1-2 year time-frame and start to
unlock growth opportunities – we think the next 6-12m will be difficult,
however. Structurally, non-interest income will likely lag loan growth
(when the trend rate of 25-30% is restored) and we expect it to be a longterm
ROA/ROE depressant. We believe IDFC is, thus, stuck in 14-15%
long-term potential ROE zone.
These challenges underpin our cautious stance on IDFC, despite the PB
(1.6x FY12) falling to 1sd below mean. We see cyclical issues persisting in
the medium term, and the structural issues do not seem fully recognized by
consensus. Maintain Neutral –we see little upside in the medium term.
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