IDFC - Q4FY09 Result Update ( CMP ; Rs 98, Reduce ) Disappointing Results – IDFCs operating performance in Q4FY09 was disappointing with Net Interest Income coming in lower than our estimates at Rs 252.5 crores (or 2.2% lower q-o-q) as balance sheet contracted sequentially. Outstanding disbursements also contracted 1.2% y-o-y. Overall performance was also much lower than expectations with net profits shrinking 37.5% q-o-q and 22.8% y-o-y on account of higher operating expenses and provisions. Management clarified that the higher provisions were 'one time' and unlikely to be recurring. Operating expenses were also inflated on account of 'one time' costs related to launch of new funds that were booked in Q4FY09. IDFC experienced impressive revenue growth in principal investments and asset management on account of growth in assets under management. Income from capital markets and corporate advisory activities declined 49% y-o-y on account of slowdown in corporate activity. Margin Improvement – Margins expanded 30 bps q-o-q to 2.6 in Q4FY09 from 2.3 in Q3FY09 on account of repricing of some loans at higher interest rates. Commercial paper rates, a proxy for NBFC funding costs, have continued to trend downwards on account of reduced risk aversion and comfortable liquidity. Further reduction in interest rate spreads will help IDFC margins by reducing funding costs. Margins in the infrastructure business were even higher with Net Interest Income increasing 34% y-o-y inspite of shrinking balance sheet size. Asset Quality – Management has prudently focused on capital conservation and asset quality in the tough economic environment. Gross NPA climbed to 0.4% while net NPA stood at 0.2%. Increase in provisions of Rs 153.1 crores (118% y-o-y) in FY09 will buffer future loan losses. The cumulative loan loss provision stands at Rs 371 crore (1.8% of the standard loan asset compared to 1.2% in FY08). The company has consciously reduced balance sheet exposure to Industrial and commercial real estate portfolio from ~15% in FY08 to ~13% in FY09. IDFC also reduced its exposure to Loans against shares from ~11% in FY08 to ~8% in FY09. Our View – At current price of Rs 98 the stock is trading at ~1.81x FY10E P/BV. We downgrade rating of the stock to 'reduce' with a target price of Rs 85, giving a potential downside of 15% from current levels, on account of: 1) constraints on balance sheet growth in FY10 on account of rating agency requirement of 20% tier I capital for AAA credit rating; 2) policy constraints due to political uncertainty, particularly in NHDP, will reduce business opportunities in the infrastructure sector; 3) delay in financial closure of large infrastructure projects on account of difficulty in raising equity capital will slow future business growth; 4) challenging financial markets will slow private equity fund raising and hurt carry income from existing PE funds; 5) slowdown in non interest income growth, particularly in corporate advisory and asset management; 6) depressed valuations will delay monetizing strategic stakes in unlisted entities (such as NSE). We raise our target price to 85 on account of: 1) margin expansion due to reduced costs of funds on account of comfortable liquidity and higher risk appetite; 2) continued strong asset quality. Warm Regards,
KRC Research
Kisan Ratilal Choksey Shares and Securities Pvt. Ltd.
Mumbai,
INDIA.
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