IDFC: Buy :: Business Line

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IDFC’s growth will be driven by refinancing and existing pipeline of loans.

Infrastructure Development Finance Corporation (IDFC), one of the leading project lenders in India, has weathered the tough times extremely well. IDFC delivered a loan growth of 16 per cent in 2012-13 in a difficult market. Its asset quality has remained healthy, with gross non-performing assets at 0.15 per cent of loans. This is commendable, considering IDFC’s significant exposure to the ailing energy sector.

The company’s tier-I capital adequacy of 19.8 per cent is well above the mandated 10 per cent for infrastructure finance companies. In 2012-13, the company was able to actually increase its spread (return on loans less the cost of funds) by 20 basis points to 2.5 per cent. The return on assets was also healthy at 2.8 per cent.

Substantial recovery in infrastructure sector is not on the cards in the next one year. But IDFC’s loan book is expected to grow by 15 per cent, driven by refinancing and existing pipeline of loans.

Even with some slippage expected in asset quality, its earnings are likely to grow 15 per cent. The stock at its current price of Rs 143 trades at 1.5 times its one-year forward adjusted book value, well below its five-year average of 1.9 times. This could limit downside on the stock.

While the above capture only the parent’s business, IDFC’s subsidiaries in asset management and private equity also offer scope for scaling up of profits and stable revenues.

There has been a three-fold growth in mutual fund assets in the last four years and profits could improve on the back of regulatory changes.

In private equity, exits through strategic sales may help unlock value. The investment banking and broking businesses remain quite cyclical and at the mercy of stock markets. But these could deliver significant payoffs if markets improve. The subsidiaries can be valued at Rs 25 per share adding to the core business value.

The stock remains a good play on a recovery in the infrastructure space. Also, the company is looking at obtaining a banking licence to diversify its asset base. Investors with one-to-two year perspective can buy the stock at current levels.

REFINANCING AND LOAN PIPELINE

IDFC is a major lender to infrastructure projects and is also engaged in private equity, project equity, investment banking, equity broking and asset management through subsidiaries.

Despite concerns in the infrastructure sector, the company has been able to grow its loan book at an annual rate of 28 per cent during FY2009-2013.

As of date, the energy sector contributes 40 per cent of its loan book, while the other two key sectors —transportation and telecom — constitute 25 per cent and 21 per cent of the loan book.

However, challenges in the last two years have significantly impacted the company’s pipeline of loans. After scaling up significantly till 2010-11, new loan approvals and disbursements have declined in the last two years. In 2012-13, approvals declined 17 per cent over the previous year to Rs 26,576 crore, and disbursements declined 4 per cent to Rs 17,695 crore. The pipeline — loans approved but not disbursed — is at Rs 11,815 crore which is 21 per cent of the 2012-13 loan book. This has consistently shrunk from around Rs 16,000 crore in 2010-11.

In 2012-13, with the new project pipelines drying up, IDFC’s loan book grew on the back of refinancing opportunities on older projects and disbursements of loans approved earlier. Near-term challenges could mean a limited increase in new projects approaching IDFC for funding. But IDFC should continue to grow 15 per cent in the current year, on the back of refinancing and existing loans.

While the infrastructure sector is constrained by a slowdown in investments in the short run, recent reform initiatives, particularly in the power sector, could bring good tidings. The financial restructuring package to State electricity boards, signing of fuel supply agreements by Coal India, and tariff hikes by state power distribution companies may rev up the investment cycle and improve loan growth for lenders such as IDFC in the long-run.

In power generation, the capacity addition in 2012-13 exceeded the targeted 17,956 MW by 2,666 MW.

If projects proceed as scheduled, then the entire 88,537 MW planned for the 12th Plan (2012-2017) may be achieved, entailing an investment of around Rs 11 lakh crore. This could translate into significant lending opportunities for IDFC.

ASSET QUALITY

Despite the concerns in the infrastructure sector, IDFC has consistently maintained its asset quality too. Its gross non performing assets (GNPA) accounted for 0.15 per cent of loans in 2012-13.

The management has guided for higher slippages in the current year, with GNPA expected to increase to 1 per cent of loans, which is still lower than most banks.

This may lead to incremental provisioning costs of 0.5 per cent of loans as against 0.4 per cent in FY 2013.

That said, with loan growth of 15 per cent and healthy net interest margins of 4.1 per cent, earnings can grow by 15 per cent in FY 2014 in spite of the incremental provisioning.

IDFC’s well-diversified borrowing profile reduces its cost of funds. It raises funds through term loans from banks, issuance of bonds and commercial papers, and from the international market through external commercial borrowings (ECBs).

IDFC, one of the largest issuers of bonds in the domestic market, has also significantly tapped the overseas market in FY 2013, raising $525 million through ECB.