IDFC

KRChoksey is bullish on Infrastructure Development Finance Company (IDFC) and has recommended buy rating on the stock with a target of Rs 206 in its March 31, 2011 research report.

“Infrastructure Development Finance Company (IDFC) posted consolidated PAT of Rs 321 crore growing 19% y-o-y but down 5% q-o-q (Lower than our estimate of Rs 357). Approval and disbursement up 121% y-o-y & 183% y-o-y respectively indicating strong buoyancy in infrastructure financing space. NII increased 65% y-o-y and 23% q-o-q driven by strong loan growth, stable spreads and uptick in treasury NII (up213% q-o-q). Lower trading gains and subdued fee income from asset management business and weaker loan related fee income dragged non- interest income during the quarter. Loan related fee income declined 63% q-o-q, however loan related fee income grew strongly 94% y-o-y in 9mFY11 reflecting underlying strong growth momentum. Non interest income decreased 16% y-o-y coupled with sharp rise in OPEX dragged the profitability.”

“Net interest income grew strongly by 65% y-o-y mainly driven by strong loan growth at 51% y-o-y, stable spreads and sequential sharp uptick in NII from treasury. Lending business contributed ~ 70% of operating income during the quarter, however non-interest income’s share has declined from 42% in Q2FY11 to 30% on the back of lower capital gains, subdued fee income from asset management businesses. Fee income from lending operation grew 68% y-o-y driven by acceleration in sanctions and disbursements. Total non-interest income decreased 16% y-o-y to Rs 201 crore due to lower capital gains and weaker fee income from asset management. On excluding capital gains, non-interest income witnessed 27% y-o-y to Rs171 crore. We expect Net interest income to grow 55% CAGR over FY10-12 driven by strong loan growth. Core lending spread remained stable at 2.4% indicating return of reasonable pricing power. With diversification of liability franchise and targeting better yield on asset side, we expect IDFC to sustain core lending spread at 2.3-2.4% going forward.”

“Operating expenses grew 50% y-o-y and 33% q-o-q driven by heavy variable compensation provisioning reflecting higher earnings growth visibility going forward. Cost to income ratio shot up 562bps q-o-q and 366bps y-o-y to 24.5%, however, the management has guided us that cost to income ratio is likely to improve on the back of higher operating leverage and lower variable bonus provisioning going forward. Gross approvals and gross disbursement increased 121% y-o-y and 183% y-o-y indicating buoyancy in infrastructure financing space. Loan book grew 51% y-o-y and 21% q-o-q largely from power and transportation sector. The management is targeting 3x balance growth over next three –four years, majority of growth would be front loaded. We believe current capital base coupled with internal accruals would be sufficient to support this strong asset growth.”

“IDFC performed strongly on lending side but disappointing on fee based businesses during the quarter. Strong loan growth, reasonable pricing power, relatively stable spreads were key highlights of the quarter. However, continuous disappointing performance from asset management and institutional broking businesses are cause of concern to us. We have cut earnings estimate 7% and 10% for FY11 and FY12 respectively factoring lower fee incomes and capital gains.”

“We have also reduced our target price from Rs 254 to Rs 206 factoring downside risk emerging from rising interest rate and tight liquidity environment. Unique business model, strong earnings growth outlook coupled with favorable risk-reward offers compelling investment opportunity in medium term. At Rs 145, the stock is trading 11.1x FY12 earnings and 1.7x FY12BV. Hence, we maintain our BUY rating on the stock with a target price of Rs 206 (Potential upside 33%),” says KRChoksey research report.

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