IDFC Limited Stock Analysis – Overview
From the author: IDFC Limited (“IDFC” or the “Company”) is an integrated infrastructure finance player providing end to end infrastructure financing and project implementation services. The Company operates through seven wholly owned subsidiary companies. For a financial report on the company and business verticals – IDFC financial statements.
Disclaimer: The stock analysis presented below should not be taken as a buy/sell recommendation. The circumstances of the company and the economic environment may have changed since the date of this stock analysis.
What’s driving the stock
Growth in Infrastructure sector
The infrastructure sector accounts for 26.7 % of India’s industrial output. The Government has identified infrastructure development as a key priority in its five year plans. Realizing the importance of the sector, the government has put in place various initiatives to accelerate the development of infrastructure in the country. These include setting up various targets, installing mechanisms to monitor progress and streamlining the execution process of various infrastructure projects around the country.
The Company’s client base includes leading OEMs like Tata Motors, New Holland Tractors, John Deere Equipment, VST Tractors, John Deere Coffeyville Works, Ashok Leyland, Man Force, TAFE, Escorts, and JCB. BGL also supplies to tier I companies like Dana Corporation, Spicer India and Carraro.
The Planning Commission has projected that investment in infrastructure would almost double at Rs. 40.9 trillion in the Twelfth Five Year Plan (2012-17), compared to Rs. 20.5 trillion in the Eleventh Plan. Given the scale of investment required, substantial proportion of the investment is expected to be met through private financing or through public private partnerships (PPP). This planned investment in the Twelfth Plan is likely to create a huge order pipeline for the private sector to implement. The Twelfth Plan has aggressive investment targets with at least 50 % of the investment proposed to be contributed by the private sector.
Strong loan growth driven by refinancing
Despite concerns in the infrastructure sector, the company has been able to grow its loan book at an annual rate of 28 % during FY2009-2013. In FY13, IDFC’s loan book grew 16 % y-o-y to Rs. 56,595 Cr. driven mainly by refinancing opportunities on older projects and disbursements of loans approved earlier. For FY13, gross approvals, and disbursement increased by 103 % y-o-y and 55 % y-o-y respectively driven by strong growth in refinancing space within the overall infrastructure finance. The Management is expecting a significant growth in refinancing business and has set a target to advance its loan book by over 20 % in the current financial year.
High Net Interest Margins (“NIMs”)
For financial year 2013, IDFC reported a 4.1 % jump in its net interest income (NII) over the previous year despite worsening economic conditions for most part of the year. For the nine months ending December 2013, NII increased by 6% from Rs. 1,921 Cr. to Rs. 2,036 Cr.
Net interest margin for nine months period stood at 3.90 %. We believe that in the next few quarters IDFC will continue to enjoy the advantage of having this wide spread on its interest income.
What’s Dragging the Stock
Significant exposures to certain sectors
IDFC has increasing dependence on the infrastructure lending business. The revenue contribution from this business was 83% in FY2013, versus 76% in FY2012. High exposure to power and infrastructure sectors makes IDFC’s performance largely dependent on infrastructure spending and commodity prices, which can be volatile. As of 31st March 2013, the energy sector has a significant share of 41 % followed by transportation – 25 % and telecom – 23 %. In past economic downturns, infrastructure projects and capital investments in India was severely impacted. Any slowdowns in future may cause large defaults on IDFC’s loan book.
Weakening Asset Quality
Asset quality has been hit with Gross Non Performing Assets (GNPAs) rising to 0.62% and Net Non Performing Assets (NNPAs) rising to 0.50% compared to 0.32% and 0.20% in FY2014 Q2. IDFC’s asset quality has deteriorated sharply in absolute terms ‐ gross NPA and net NPA grew 88.8 % q‐o‐q and 146.8 % q‐o‐q to Rs. 340.8 Cr. and Rs. 274.7 Cr. Management has also maintained a cautious stand on the asset quality and expects GNPAs to increase to 1.5% over next two years from the existing 0.62%. The management has also highlighted that its gas‐based power plant exposure, which currently stands at 4% of the loan book is also a concern due to unavailability of gas and may need to be restructured.
Rajat Sharma is the CEO at Sana Securities, an independent equity research and financial advisory firm in India. Views expressed here are of the author and RKSV has not verified any facts stated above.