DSIJ Mindshare

IDFC: Growth Foundations

With the country revving up on the expressway to development, the country’s leading infrastructure finance company, IDFC, looks set for a steady ride upward. Vidrum Mehta tells you more about the company and the investment prospects it holds.

Good roads, smart ports, continuous availability of power, rapid industrialisation and a booming economy – this would surely be the most ideal situation that countries throughout the world would love to be in. But the one very important factor that drives all this to reality is the funding required.

Infrastructure funding has always been a key issue with governments globally. This sometimes becomes a tricky situation, with governments facing a lot of pressure on account of the high financing needs of such projects. In this respect, the story of India isn’t very different. Though we have achieved a lot, there is a huge gap between our goals and our accomplishments.

Infrastructure in India is like a glass half full. While it is still found lacking due to various bottlenecks, one may find a whole lot of opportunities in this sector in India. The government has been laying immense stress on infrastructure development and this has kept the sector ticking well.

In fact, one reason why this sector looks good to invest in right now is the speed at which the government has been moving ahead on the reforms front. This bodes well for the sector, which is likely to see a good upward trajectory once the reforms start gaining actual pace at the ground level. Infrastructure spending as a percentage of the GDP is expected to touch double digits in the coming years. As per a Planning Commission report, the government spent around Rs 20.54 lakh crore in the 11th Five Year Plan period on infrastructure development, and this is likely to go up to Rs 40.99 lakh crore during the 12th Five Year Plan period. Close to a trillion dollars are earmarked to be spent during the 12th plan period and this is no mean figure.[PAGE BREAK]

So how do you capitalise on this huge opportunity? Well, obviously it would pay to be invested in the right kind of assets that will ride this one trillion dollar boom in the infrastructure sector. What better way can you think of than investing in a company which will be funding these huge projects going forward?

Within the limited space of infrastructure funding companies, one name that finds prominent mention is Infrastructure Development Finance Company (IDFC). Let’s take a deeper look at what this company is all about and whether or not you should be investing in it at its current price levels.

About IDFC

IDFC has a well diversified business model and is run by a strong management. The company has been instrumental in shaping various large and small infrastructure projects in India. In fact, a whole lot of infrastructure development policies have been drawn up by the government in consultation with the management of this company.

IDFC enjoys the status of being an Infrastructure Finance Company (IFC), which allows for greater diversification of its business. At present, around 20 per cent of the company’s fund requirement is raised from overseas sources. The cost of borrowing from external sources made sense, as interest rates in India were at a higher level as compared to global sources. This has helped the company in maintaining a good operational performance. In this regard, Sunil Kakar, Group CFO, IDFC, has this to say, “Access to overseas sources of funds is much easier, and if timed right, they could be marginally cheaper relative to domestic sources on a fully hedged basis”.

Earlier, IDFC used to be a plain vanilla non-banking finance company (NBFC). However, since its status has been upgraded to that of an infrastructure finance company, it can now raise upto 20 per cent of its networth (as against the earlier 15 per cent) from banks to support its funding business.

[PAGE BREAK]

As of March 31, 2012, the company’s loan book stood at Rs 48888 crore, marking a CAGR of 38 per cent over the last two years. It has managed to sail through a difficult scenario, posting a robust loan growth, despite slower economic growth in the two-year period. This is because of the good business mix that the company has.

The loan book is well diversified across major infrastructure segments. Of the total loans that the company has extended, around 42 per cent is to the energy segment (majorly including companies in generation, transmission and distribution of power including renewable energy), 23 per cent towards transportation (classified into roads, ports and airports), 23 per cent towards telecom and the remaining 12 per cent or so is provided to others. Its exposure to the energy and transportation sector has increased over the years.

The company has been shifting its focus to the refinancing and corporate loans businesses, and expects that this would drive its loan book going ahead. Refinancing is a better option as it is less risky compared to greenfield projects and the chance of asset quality worsening is far lesser. The company expects to have a larger market share of the refinancing business going ahead.

Private Infrastructure Financing – A Boon For IDFC

In the 11th Five Year Plan, the private-public spending ratio on infrastructure projects stood at around 36:64, which was up from what it was during the 10th Five Year Plan (25:75). Private participation in the lending space has increased over the years and in future, private players would be major contributors to infrastructure development in the country.

IDFC undertakes around 15-20 per cent of the total private infrastructure financing in the country. It is the first company to garner such a wide share of the market. Having a major advantage in terms of being the first mover in this space, there is every possibility that its business will only improve from here on. For FY13, the management expects a good growth of around 20 per cent in its business and incremental growth of another 15-20 per cent thereafter.[PAGE BREAK]

IDFC has posted a robust financial performance over the years. Its operating income has seen a five year CAGR of 32 per cent, standing at Rs 6336 crore at the end of FY12, while the net profit witnessed a CAGR of 25 per cent to touch Rs 1554 crore during the same period.

In FY12 too, the company had posted good numbers. On a consolidated basis, its net interest income (NII) increased by 28 per cent to Rs 2113 crore on a YoY basis, while the net profit grew by 21 per cent to Rs 1554 crore.

The company’s Cost-to-Income ratio declined by 340 basis points to 17.5 per cent in FY12. It again declined and stood at 16.5 per cent in the first nine months of the current fiscal, reflecting on the better efficiency of the business. The management expects to keep the ratio below 17 per cent, which indicates that its operational performance will improve going ahead.

In FY12, the net interest margin (NIM) of the company improved by 14 basis points to 4.33 per cent on a YoY basis. As on March 31, 2012 its Capital Adequacy Ratio (CAR) stood at 20.8 per cent, which is well above the RBI’s guideline. The apex bank currently stipulates maintaining a minimum of 15 per cent CAR and this will be brought down even further to 12 per cent effective from March 2015. This will help the company to release additional funds, which could then be disbursed and would go towards increasing its overall business.

IDFC faced some headwinds on the asset quality front in FY12. Its Gross and Net NPAs increased by 9 and 5 basis points to 0.3 and 0.15 per cent on a YoY basis respectively. However, the asset quality has improved in the first nine months of FY13, as both decreased by 4 and 3 basis points to 0.26 and 0.12 per cent respectively. The company has some exposure to the gas-based power generation projects, due to which it may see some pressure on its asset quality in the near term. Kakar, however, remains very optimistic with regard to the assets. “Our overall asset quality would continue to be robust, with negligible impact on credit costs”, he opines.

[PAGE BREAK]

Wealth Creation & Investor Interest

IDFC has been a wealth creating company right from its IPO days. It came up with an IPO in 2005 at an issue price of Rs 34 per share. At its current market price of Rs 158, the scrip has witnessed a CAGR of 23 per cent over the last seven and half years. It has also been an outperformer in CY2012, surging by 87 per cent as compared to the Nifty, which appreciated by 28 per cent during the same period. In fact, IDFC was the best performing Nifty stock in CY12.







Foreign Institutional Investors (FIIs) have increased their stake in this counter substantially. They have come to hold around 53.16 per cent in the company at the end of the December quarter of 2012 from around 45.81 per cent that they had during the same quarter last year.

IDFC is also a consistent dividend paying company. For FY12, the company declared a dividend of Rs 2.30 per share, resulting in a dividend yield of 1.5 per cent at the current market price.[PAGE BREAK]

Should You Invest?

The company has a fairly diversified business portfolio. Other than its core lending business, it has interest in segments like mutual funds, alternative asset management and the capital market. Hence, the valuations should take into consideration all these business segments. On a standalone basis, IDFC is currently trading at Price to Book Value of 1.75x, which we believe is fair. As on December 31, 2012, its AUM stood at around Rs 37868 crore in its mutual fund and alternative asset management businesses.

Besides these, IDFC has a major stake in the NSE, the Securities Trading Corporation of India (STCI) and the Asset Reconstruction Company of India (ARCIL). These stakes, if monetised, would bring in a good amount of cash for the company. On a consolidated basis, IDFC is available at a TTM Price-to-Earnings multiple of 14.61x.

It is a strong contender for the new banking license, and is waiting for the final guidelines on the same. Any positive development on this front would result in a spurt in the share price. Overall, we believe that IDFC has strong financials, good management, and is expected to see robust growth going ahead. One should invest in the counter, keeping a long-term horizon in mind to garner better returns.

DSIJ MINDSHARE

Mkt Commentary28-Mar, 2024

Multibaggers28-Mar, 2024

Interviews28-Mar, 2024

Multibaggers28-Mar, 2024

Multibaggers28-Mar, 2024

DALAL STREET INVESTMENT JOURNAL - DEMOCRATIZING WEALTH CREATION

Principal Officer: Mr. Shashikant Singh,
Email: principalofficer@dsij.in
Tel: (+91)-20-66663800

Compliance Officer: Mr. Rajesh Padode
Email: complianceofficer@dsij.in
Tel: (+91)-20-66663800

Grievance Officer: Mr. Rajesh Padode
Email: service@dsij.in
Tel: (+91)-20-66663800

Corresponding SEBI regional/local office address- SEBI Bhavan BKC, Plot No.C4-A, 'G' Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400051, Maharashtra.
Tel: +91-22-26449000 / 40459000 | Fax : +91-22-26449019-22 / 40459019-22 | E-mail : sebi@sebi.gov.in | Toll Free Investor Helpline: 1800 22 7575 | SEBI SCORES | SMARTODR