IDFC Limited (IDFC) – Q2FY15 Result Update November 07, 2014 RETAIL RESEARCH

IDFC Limited (IDFC) – Q2FY15 Result Update
RETAIL RESEARCH
HDFC Scrip Code
IDFLTDEQNR
Industry
Finance
CMP
152.10
November 07, 2014
Recommendation*
Time Horizon
Buy at CMP and add on dips to Rs 129 - 135 band for a target of Rs. 164
1 quarter
*Applicable till Q3FY15 results are announced
NII growth come down; NIMs and spreads fall slightly
Net Interest Income (NII) during Q2FY15 has come down 5.7% y-o-y and 5% q-o-q to Rs 648 cr with net loan book down 3.5% y-o-y. Treasury income continues to do
well with a jump from Rs 46 cr in Q2FY14 and Rs 68 cr in Q1FY15 to Rs 90 cr in Q2FY15. Rolling 12 months NIMs and average spreads have come down slightly to 3.8%
and 2.1% respectively after being flattish in the previous three quarters. Margins of the company were lower mainly on account of higher incremental lending to the
top rated customer carrying lower yields.
(Source: Company, HDFC sec)
Non Interest Income up 126.8% y-o-y
Non-interest income which comprises of Principal Gains, Asset Management, Investment Banking, Fixed Income and Loan Related Fees has gone up from Rs 198 cr in
Q2FY14 and Rs 134 cr in Q1FY15 to Rs 449 cr in Q2FY15 mainly because of benefits from Principal Gains. Strong capital gains are on account sale of two real assets on
the balance sheet. On a lower base, the investment banking business of the company has also done well and has gone up from Rs 8 cr to Rs 24 cr in Q2FY15. Fees from
asset management business have gone up from Rs 93 cr to Rs 107 cr y-o-y.
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(Source: Company, HDFC sec)
Net Loan book down 3.5%y-o-y; Coal sector exposure at 5%
Net Loan book has come down 3.5% y-o-y to Rs 53,038 cr. Disbursements have come down 2.7% y-o-y approvals are down 7% y-o-y. Exposure to the energy sectors have
gone up from 34% to 38% y-o-y. Transportation sector share has come down from 25% to 22% y-o-y. Management has guided for modest growth in infrastructure loans
over FY13-FY15.
Cumulative outstanding approvals have come down 7% y-o-y to Rs 73793 cr. Energy continues to have the maximum exposure at 38% in Q2FY15 compared to 34% in
Q2FY14. Exposure in Transportation to have come down from 25% to 22% y-o-y. Telecom & Others have remained almost stable at 25% and 15% respectively. Total
Outstanding disbursements have come down 2.7% y-o-y and up 0.8% q-o-q to Rs 58502 cr. Company has exposure to coal sector, including power sector with coal mines
at 5% of the loan book.
(Source: Company, HDFC sec)
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Borrowings up 13.1% y-o-y
Borrowings have gone up 13.1% y-o-y to Rs 59564 cr. There has been a spike in short-term loans which has more than doubled y-o-y from Rs 4847 cr to Rs 10392 cr.
Foreign currency loans have gone up 31.7% y-o-y to Rs 8806 cr. IDFC’s borrowings in bonds have been almost flat, up only 1.1% y-o-y to Rs 34854 cr. Long term rupee
loans have gone down 19.2% y-o-y to Rs 4862 cr. Duration between assets and liabilities has shrunk. Duration of assets (1.5 Years) is marginally less than duration of
liabilities (1.6).
(Source: Company, HDFC sec)
GNPAs and NNPAs marginally down
Non-performing assets (%) have come down marginally with GNPAs at 0.62% and NNPAs at 0.42% in Q2FY15 down from 0.64% and 0.43% in Q1FY15. This has come in
the background of management’s continuous indication in the previous few quarters that present NPAs are unsustainable at low levels and gross NPA is likely to rise to
1.0-1.5% mark in next 12-18 months. 87% of restructured assets come from energy sector; half of which are gas based power projects. Net Restructured Loans as on
September 30, 2014 are 6.1% of gross loans.
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(Source: Company, HDFC sec)
Provisions have jumped from Rs 50.1 cr to Rs 281.2 cr y-o-y. Company has continued with prudent policy of building counter-cyclical provisions. It stepped up overall
provisions outstanding to 3.6% of loans from 3.1% a quarter ago and 2.4% a year ago. Company proposes to continue to build provisions for next few quarters with a
view to avoid any surprising provision requirement in a first year of banking operation. HR cost will keep building up due to continuous hiring; Cost to Income will keep
inching up and should settle at 30% by the time IDFC becomes bank. IDFC has reported a 11.3% y-o-y decrease in PBT from Rs 701 cr to Rs 622 cr. Reported PAT is down
13.6% y-o-y and 12.7% q-o-q to Rs 421 cr.
As a result of a change in depreciation policy, the charge on account of depreciation in standalone accounts is lower for the half year ended Q2FY15 by Rs 81.2 cr and for
the quarter ended Q1FY15 by Rs 80.4 cr (including write-back of Rs 78.9 cr upto March 31, 2014) and in consolidated accounts it is lower by Rs 88.7 cr for the half year
ended September 30, 2014 and for the quarter ended Q1FY15 by Rs 87.7 cr (including writeback of Rs 84.7 cr up to March 31, 2014) as compared to the method used
and useful lives estimated in earlier periods.
Capital Adequacy was at 25.9% as on September 30, 2014 (of which Tier I at 23.7%). The Company has allotted 73000000 equity shares of Rs 10 each at a premium of Rs
127 per share on September 16, 2014 pursuant to a Qualified Institutions Placement under SEBI. The proceeds from the Qualified Institutions Placement is pending
utilization in accordance with the objects as set out in the offer document. The Company during the quarter and half year ended September 30, 2014 has also issued
435916 and 981745 equity shares respectively of face value of Rs 10 each pursuant to exercise of stock options by employees under the employee stock option scheme.
Demerger of Financial undertaking of IDFC Ltd into IDFC Bank Ltd
The Board has approved a proposal to demerge its financing undertaking into its wholly owned step down subsidiary IDFC Bank Limited pursuant to a Scheme of
Arrangement under Sections 391-394 of the Companies Act, 1956 which will be completed over next six-nine months. IDFC Bank Limited will issue one equity share of
Rs. 10 each for every one equity share of Rs. 10 each held in IDFC Limited. The shareholders of IDFC Limited will continue to hold their shares in IDFC Limited. On
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completion of demerger, equity share capital of IDFC Bank will be held ~ 53% by IDFC Financial Holding Company Limited, a 100% subsidiary of IDFC Limited, and ~ 47%
by the shareholders of IDFC Limited. The Scheme would be effective upon receipt of all requisite approvals including approval from shareholders, creditors, SEBI, Stock
Exchange(s), RBI, Madras High Court and filing the certified copies of the order of the Madras High Court with the Registrar of Companies, Tamil Nadu at Chennai and RBI
granting Final Banking License. Bank will be operational by Oct 2015. The proposed bank has to be CRR/SLR compliant on the first day of operations. The company would
build the investment book depending on its interest rate view and be compliant with the norms. IDFC Bank shares will be listed on completion of demerger process
However there is very limited clarity by the company on how the opex, capital allocation will be done and on the overall banking strategy.
Concerns
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Inability to raise capital in future could impact growth
Rising interest rates could impact the cost of funds and also impact demand for funds
Inherent risks in infrastructure financing
Lack of infra spending and weak economy could impact demand for loans.
Significant exposures to certain sectors like power (~44% in Q1FY15)
Foreign currency risk as 15% loans borrowed are in foreign currency
Discontinuation of tax benefits could affect profits
Competitive and profitability pressures in the capital market related businesses
Return on Assets has fallen consistently from 3.4% in FY10 to 2.8% in FY13 and further 2.2% in Q2FY15.
ROE to be impacted by the company’s transition from an NBFC to a Bank. Further valuations could be temporarily impacted if the transition steps required for Bank
are deemed to be shareholder unfriendly.
Deliberate slowdown in lending till the Banking operations roll out could slowdown the medium term growth trajectory.
Challenges in setting up the bank remain a risk. Obtaining low cost deposits in a competitive scenario and adhering to priority sector lending are other challenges.
Outlook & Valuation
IDFC has been performing well in the past reflected in growing loan book size, interest income, disbursements and profits. Besides structural advantage over banks, it is
also supported by good management which has expertise in infrastructure lending. This would help in keeping its loan book growth over the medium term intact given
the potential of infrastructure financing in India. A strong return on assets ratio (though falling) of 2.2% as on Sep 2014, capital to support loan book growth, superior
credit quality are the key positives. IDFC has a strong asset quality with net NPA ratio of 42 bps of loans and ROE of 10.8%.
For Q2FY15 Net Interest Income (NII) was down 5.7% y-o-y and 5% q-o-q to Rs 648 cr with decline in loan book. NIMs and average spreads have come down marginally
to 3.8% and 2.1%. Non-interest income has gone up mainly because of higher principal gains up from Rs 198 cr to Rs 449 cr. Net Infra loans de-grew 3.5% to 53,038 cr.
Asset quality has been maintained with GNPAs coming down slightly to 0.62% while NNPAs have come down 0.42%. Provisions have gone up from Rs 50.1 cr to Rs 281.2
cr y-o-y. Reported PAT was down 13.4% y-o-y to Rs 421 cr.
Management has the conscious strategy of not growing the loan book aggressively in the tough borrowing environment. IDFC did manage well its spread despite high
interest rate environment. Its asset quality though has deteriorated in the prevailing weak macros but has remained healthy with GNPAs at 0.62% and NNPAs at 0.42%
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With IDFC transitioning to a bank, profitability is likely to come under severe pressure owing to regulatory requirements of a bank (CRR, SLR and priority sector targets).
However recent relaxations in allowing Banks to raise 7 year bonds to fund infra lending augur well for IDFC. Further introduction of REIT could boost fee income of
capital market subsidiaries of IDFC.
In FY15-16, we expect loan book to remain flat as IDFC focuses on compliance as a bank and setting up the banking infrastructure. We are revising operating expenses
and provisions for FY15 and FY16 taking into account company’s policy of making higher provisions with a view to avoid any surprising provision requirement in a first
year of banking operation and likely higher operating expenses in its run-up of its banking foray. Opex is likely to inch up due to establishment cost of bank the
resumption of growth will keep the cost income under check. Loan growth may be flat in the following years with diversified assets getting in. In next two – three
quarters, the bank will have been formed. The coming few quarters could see little growth in balance sheet and hence unexciting operational performance.
Improvement of scenario for the infra sector with relaxed lending norms announced in the budget and the demerger ratio announced have led to recent run-up in the
stock. Over medium term, further value unlocking seems possible if shareholders are offered shares of different businesses like AMC, Bank, Securities etc.
Possibility of getting 1 free share in a private sector Bank could act as a margin of safety and keep the share price buoyant.
In our Q1FY15 result update on IDFC dated August 05 2014 to buy the stock on dips to Rs 135 - Rs 141 (1.15x – 1.2x FY15E Adj BV) for a target of Rs 158 (1.35.x FY15E Adj
BV) in 1 quarter. Post that the stock has touched a high of Rs 153.35 on 19th August 2014 and a low of Rs 134.1 on 8th October 2014.
We think investors could buy the stock at CMP and add on dips to Rs 129 - Rs 135 (1.1x – 1.15x FY15E Adj BV) for a target of Rs 164(1.4.x FY15E Adj BV) in 1 quarter.
Quick Estimates
Particulars (Rs in cr)
NII
Non- interest income
Operating expenses
Cost-Income (%)
Pre Provisioning Profit
Provisions
PBT
PAT (after MI & Ass. Profit)
EPS
BV
Adj BV
P/BV
P/E
Equity
FY11
FY12
FY13
1645
875
533
21.2%
2013
235
1778
1282
8.5
74.6
74.3
1.5
13.3
1509
2113
844
523
17.7%
2434
285
2149
1544
10.2
81.2
80.9
1.4
11.0
1512
2564
884
525
15.1
2945
350
2595
1836
12.1
90.3
90.0
1.2
9.5
1515
FY14A
2704
1031
544
14.6%
3191
628
2563
1803
11.3
99.2
95.6
1.1
9.4
1516
FY15E
FY15RE
FY16E
FY16RE
2839
1103
627
15.9%
3316
271
3045
2139
14.1
108.7
105.3
1.4
10.7
1517
2839
1103
670
17.0%
3272
650
2622
1839
11.6
110.0
106.8
1.4
13.3
1590
2825
1202
725
18.0%
3303
207
3096
2174
14.3
120.7
117.2
1.3
10.6
1517
2924
1202
743
18.0%
3384
525
2859
2006
12.6
120.3
117.0
1.3
12.2
1590
(E: Estimates, OE: Original Estimates, RE: Revised Estimates; Source: HDFC sec Estimates)
Quarterly (Consolidated)
Particulars
RETAIL RESEARCH
Q2FY15
Q2FY14
% Chg
Q1FY15
% Chg
H1FY15
H1FY14
% Chg
Page | 6
(A)Net Interest Income
1.NII-Loans
2.NII-Treasury
(B)Non Interest Income
Principal Gains & Carry
Asset Management Fees
IB & Broking
Fixed Income
Loan Related Fess
(C)Other Income
Net income
Operating expenses (incl Depr)
Staff
Other Operating expenses
Pre-Provisioning Profits
Provisions
PBDT
PBT
Tax
PAT
MI
Share of profit from associate
Reported PAT
Equity
Paid Up
648
559
90
449
286
107
24
5
27
4
1101.0
197
97
100
904
282
622
622
183.3
439
4.53
-13.62
421
1590
10
687
642
46
198
107
93
8
-20
10
4
889.0
138
79
59
751
50
701
701
209.91
491
4.86
0.44
487
1516
10
-5.7%
-12.9%
95.7%
126.8%
167.3%
15.1%
200.0%
-125.0%
170.0%
0.0%
23.8%
42.8%
22.8%
69.5%
20.4%
464.0%
-11.3%
-11.3%
-12.7%
-10.7%
-6.8%
-3195.5%
-13.6%
4.9%
0.0%
682
614
68
134
-9
98
17
20
8
71
887.0
55
78
-23
832
204
628
628
141.6
486
5
0.3
482
1517
10
-5.0%
-9.0%
32.4%
235.1%
-3277.8%
9.2%
41.2%
-75.0%
237.5%
-94.4%
24.1%
258.2%
24.4%
-534.8%
8.7%
38.2%
-1.0%
-1.0%
29.4%
-9.8%
-11.4%
-4640.0%
-12.7%
4.8%
0.0%
1331
1173
158
583
277
205
40
26
35
74
1988.0
252
175
77
1736
485
1251
1251
324.9
926
9.6
-13.32
903
3107
10
1371
1273
99
531
170
186
21
121
33
8
1910.0
277
147
130
1633
109
1524
1524
472.62
1051
8.55
0.71
1044
3031
10
-2.9%
-7.9%
59.6%
9.8%
62.9%
10.2%
90.5%
-78.5%
6.1%
825.0%
4.1%
-9.0%
19.0%
-40.8%
6.3%
345.0%
-17.9%
-17.9%
-31.3%
-11.9%
12.3%
-1976.1%
-13.5%
2.5%
0.0%
(Source: Company PPT, HDFC sec)
RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office
HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022)
2496 5066 Website: www.hdfcsec.com Email: [email protected]
Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to
others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or
complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment
banking, or other services for, any company mentioned in this document. This report is intended for non-Institutional Clients
This report has been prepared by the Retail Research team of HDFC Securities Ltd. The views, opinions, estimates, ratings, target price, entry prices and/or other parameters mentioned in this document may or
may not match or may be contrary with those of the other Research teams (Institutional, PCG) of HDFC Securities Ltd.
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