Infrastructure Development Finance
(IDFC.BO)
Look Beyond the Cyclical Pain
Lowering Target Price to Rs135, maintain Buy — We revise our target price
for IDFC to Rs135 per share on the back of 0-7% lower earnings for FY12-13E
(incorporating lower gain on capital market segments, partly offset by higher net
interest margins) and lower P/BV valuation multiple (1.5x 1yr Fwd P/BV) to
account for increased risks to growth and asset quality. Maintain Buy.
Macro Pressures Exist, But More Cyclical in Nature — With the tougher
macro environment, particularly in the infrastructure space, IDFC's business
momentum has been impacted. However, IDFC has strong underwriting skills,
credible track record, cautious management and strong provisioning levels –
reduce asset risks going ahead. NPLs continue to be best in class and coverage
levels high (8x loan loss coverage). While higher rates and regulatory stand-off
will likely impact loan growth and hurt near term profitability, we believe longer
term opportunities remain intact.
Quant View: Unattractive — As per our quantitative team IDFC currently lies in
the Unattractive quadrant of our Value-Momentum map with weak momentum
and weak valuation scores.
IDFC currently lies in the Unattractive quadrant of our Value-Momentum map with
weak momentum and weak value scores. It has been a resident there since the
past 6 months. Compared to its peers in the Insurance & Other Financials sector,
IDFC fares worse on the valuation metric and on the momentum metric. On the
other hand, compared to its peers in its home market of India, IDFC fares better on
the valuation metric but worse on the momentum metric.
From a macro perspective, IDFC is likely to benefit from small-cap outperformance,
falling commodity (ex-oil) prices, tightening Asian interest rates, falling EM yields,
and a weaker US Dollar.
Infrastructure Development Finance
Company description
IDFC was established in 1997 as a specialized infrastructure financier / advisor and
to encourage private sector investments in the infrastructure sector. It has been
actively associated with the government in policy formulation, and has probably the
foremost set of skills in this space. It enjoys a central positioning as being among
the forerunners in the policy advisory space in infrastructure and is seen as the
preferred investor, lender and advisor. Though IDFC has diversified its product
offerings to include non-fund based products, asset management and private equity
along with debt finance and syndication opportunities, the lending business remains
its key operational focus.
Investment strategy
We rate IDFC shares Buy/ Medium Risk (1M) with a Rs135 target price. IDFC
appears well positioned to benefit from India's large infrastructure opportunity. We
believe IDFC has a quality management team, is one of the few pure plays on
infrastructure financial services, and offers long-term growth potential. However, it
does face cyclical challenges on – a) Growth in its core lending business (policy and
approval delays, fuel availability); b) Likely asset quality concerns – especially in the
power segment (40% of exposure), though IDFC has high coverage levels; and c)
Competitive and profitability pressures in the capital market related businesses.
Business fundamentals have however, remained healthy with no incremental asset
quality deterioration, strong and protected net interest margins and continued
strength in market positioning. We believe most of these challenges are reflected in
its sharp price correction and will lead to longer term stock upsides (though will be
linked to a turnaround in execution in the infrastructure, power segment).
Medium- to long-term, however we remain confident of IDFC's above industry loan
growth trajectory, improving profitability (increased leverage to improve returns) and
strong asset quality track record to be maintained. Moreover, any bounce-back in
the outlook for the capital market business could also be a strong catalyst for the
stock. It is currently trading cheaper than historical averages and we remain buyers
medium- to long-term.
Valuation
We have a target price for IDFC of Rs135, which is based on our sum-of-the-parts
methodology. We value IDFC's core lending business at Rs106 per share; we prefer
a P/BV multiple of 1.5x 1yr-Fwd BV (Sep'12) benchmarked below the lower band of
private banks' target P/BV multiples (2.0x – 3.5x), given its sub-15% core ROE. This
reflects IDFC's lack of retail asset, liability and distribution franchises relative to
premier private bank franchises. We value the asset management business as a
percentage of assets and value this business at Rs9 per share sub-divided into Rs3
for the private equity segment (5% of AUMs) and Rs6 for the domestic AMC
business (4% of AUMs). We value IDFC's broking and investment banking business
at Rs2 per share based on 10x 1yr Fwd profits. Finally, we also add Rs18 for IDFC's
investment portfolio including the NSE (valued in-line with the last reported
transaction).
Risks
We rate IDFC shares Medium Risk, in line with our quantitative risk system, which
tracks 260-day historical share price volatility. While IDFC’s increasing scale and
strong asset quality track record reduce risks, we believe its mono-segment lending
and inherent exposure to capital markets increase its risk profile. Key downside
risks that could restrict the stock from achieving our target price include: a) Sharp
increases in interest rates; b) Significant slowdown in infrastructure growth and
asset quality; c) Continued softness in capital markets for a relatively longer period;
d) Regulatory changes and a higher tax rate.
(IDFC.BO)
Look Beyond the Cyclical Pain
Lowering Target Price to Rs135, maintain Buy — We revise our target price
for IDFC to Rs135 per share on the back of 0-7% lower earnings for FY12-13E
(incorporating lower gain on capital market segments, partly offset by higher net
interest margins) and lower P/BV valuation multiple (1.5x 1yr Fwd P/BV) to
account for increased risks to growth and asset quality. Maintain Buy.
Macro Pressures Exist, But More Cyclical in Nature — With the tougher
macro environment, particularly in the infrastructure space, IDFC's business
momentum has been impacted. However, IDFC has strong underwriting skills,
credible track record, cautious management and strong provisioning levels –
reduce asset risks going ahead. NPLs continue to be best in class and coverage
levels high (8x loan loss coverage). While higher rates and regulatory stand-off
will likely impact loan growth and hurt near term profitability, we believe longer
term opportunities remain intact.
Quant View: Unattractive — As per our quantitative team IDFC currently lies in
the Unattractive quadrant of our Value-Momentum map with weak momentum
and weak valuation scores.
IDFC currently lies in the Unattractive quadrant of our Value-Momentum map with
weak momentum and weak value scores. It has been a resident there since the
past 6 months. Compared to its peers in the Insurance & Other Financials sector,
IDFC fares worse on the valuation metric and on the momentum metric. On the
other hand, compared to its peers in its home market of India, IDFC fares better on
the valuation metric but worse on the momentum metric.
From a macro perspective, IDFC is likely to benefit from small-cap outperformance,
falling commodity (ex-oil) prices, tightening Asian interest rates, falling EM yields,
and a weaker US Dollar.
Infrastructure Development Finance
Company description
IDFC was established in 1997 as a specialized infrastructure financier / advisor and
to encourage private sector investments in the infrastructure sector. It has been
actively associated with the government in policy formulation, and has probably the
foremost set of skills in this space. It enjoys a central positioning as being among
the forerunners in the policy advisory space in infrastructure and is seen as the
preferred investor, lender and advisor. Though IDFC has diversified its product
offerings to include non-fund based products, asset management and private equity
along with debt finance and syndication opportunities, the lending business remains
its key operational focus.
Investment strategy
We rate IDFC shares Buy/ Medium Risk (1M) with a Rs135 target price. IDFC
appears well positioned to benefit from India's large infrastructure opportunity. We
believe IDFC has a quality management team, is one of the few pure plays on
infrastructure financial services, and offers long-term growth potential. However, it
does face cyclical challenges on – a) Growth in its core lending business (policy and
approval delays, fuel availability); b) Likely asset quality concerns – especially in the
power segment (40% of exposure), though IDFC has high coverage levels; and c)
Competitive and profitability pressures in the capital market related businesses.
Business fundamentals have however, remained healthy with no incremental asset
quality deterioration, strong and protected net interest margins and continued
strength in market positioning. We believe most of these challenges are reflected in
its sharp price correction and will lead to longer term stock upsides (though will be
linked to a turnaround in execution in the infrastructure, power segment).
Medium- to long-term, however we remain confident of IDFC's above industry loan
growth trajectory, improving profitability (increased leverage to improve returns) and
strong asset quality track record to be maintained. Moreover, any bounce-back in
the outlook for the capital market business could also be a strong catalyst for the
stock. It is currently trading cheaper than historical averages and we remain buyers
medium- to long-term.
Valuation
We have a target price for IDFC of Rs135, which is based on our sum-of-the-parts
methodology. We value IDFC's core lending business at Rs106 per share; we prefer
a P/BV multiple of 1.5x 1yr-Fwd BV (Sep'12) benchmarked below the lower band of
private banks' target P/BV multiples (2.0x – 3.5x), given its sub-15% core ROE. This
reflects IDFC's lack of retail asset, liability and distribution franchises relative to
premier private bank franchises. We value the asset management business as a
percentage of assets and value this business at Rs9 per share sub-divided into Rs3
for the private equity segment (5% of AUMs) and Rs6 for the domestic AMC
business (4% of AUMs). We value IDFC's broking and investment banking business
at Rs2 per share based on 10x 1yr Fwd profits. Finally, we also add Rs18 for IDFC's
investment portfolio including the NSE (valued in-line with the last reported
transaction).
Risks
We rate IDFC shares Medium Risk, in line with our quantitative risk system, which
tracks 260-day historical share price volatility. While IDFC’s increasing scale and
strong asset quality track record reduce risks, we believe its mono-segment lending
and inherent exposure to capital markets increase its risk profile. Key downside
risks that could restrict the stock from achieving our target price include: a) Sharp
increases in interest rates; b) Significant slowdown in infrastructure growth and
asset quality; c) Continued softness in capital markets for a relatively longer period;
d) Regulatory changes and a higher tax rate.
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