[T.S.R:10915] why to buy IDFC

INVESTMENT RATIONALE

IDFCs operating performance in Q1FY10 improved with 12% y-o-y growth in NII inspite of a 2% y-o-y contraction in their loan book on back of improved spreads. The contraction in their loan book was mainly on account of slippage in sanctioned disbursals to Q2FY10 from Q1FY10. The growth in NII in infrastructure lending business was impressive at 24%. The real surprise in Q1FY10 was the 32% y-o-y growth in non interest income, driven primarily by higher fee income from asset management (up 310% y-o-y). Operating expenses grew by 31% y-o-y driven mainly by the one time expenses related to payments to Citigroup for Project Equity fundraising. Headline profit growth at Rs 272 crores (up 30% y-o-y) was ahead of expectation on back of write back in equity related provisions as IDFC took advantage of buoyancy in capital markets to sell some of their equity holdings.

Key Developments

Increase in Balance Sheet size by 4% y-o-y to Rs 30,753 crore in Q1FY10 from Rs 29,703 in Q1FY09 Management indicated that it would continue to peruse growth at a prudent pace balance profitability and asset quality concerns Management believes that the worst is behind them and operating environment will improve going forward because of latent credit demand, particularly in the transportation Extension of take out financing scheme for NBFC's will enable IDFC to handle its Asset Liability mismatch Contraction in Net Interest Income from treasury by 38% y-o-y to Rs 25 crore in Q1FY10 from Rs 40 crore in Q1FY09

Decline in Fees from Investment Banking and Loan Related fees by 5% and 9% yo-y respectively on account of y-o-y slowdown in corporate fundraising and capital markets activity

Sharp increase in operating expenses by 31% y-o-y to Rs 103 crores on account of 'one time' expenses for AMC business and payment to Citigroup due to project equity fundraising

Write bank of provisions made in FY09 relating to equity investments as IDFC took advantage of buoyancy in capital markets to see some of its equity  investments Rs 1000 crore of CRISIL rated bonds (out of Rs 25,000 crore of borrowing), placed mainly with provident funds, outstanding Margins IDFC spreads on a rolling 12 month basis expanded 10 bps to 2.4% in Q1FY10 from 2.3% in Q4FY09. Commercial Paper rates, which are a good proxy for NBFC funding costs, declined sharply on account of comfortable liquidity in the banking system.

While borrowing costs may not stay low in the medium term, especially as
corporate investment picks up, they will be subdued for the short term given the central bank's monetary policy stance. This bodes well for IDFC's near term margin outlook.

Valuations

At current price of Rs 148, IDFC is trading 1.7x FY11e BV/s and 18.2x FY 11 E EPS. Our target price for IDFC is 170, implying an upside of 14% for current levels.

 

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