IDFC Equity Research

Date of Research – 18 January 2016

Price – Rs. 39.65

About the Company

IDFC Limited (“IDFC“or the “Company“) is an integrated infrastructure finance player providing end to end infrastructure financing and project implementation services. Headquartered in Mumbai, the Company has seven direct wholly owned subsidiary companies. The Company was formerly known as Infrastructure Development Finance Company Limited and changed its name to IDFC Limited in July 2012.

The Company businesses include: Corporate Investment Banking which includes project finance, fixed income & treasury, investment banking and securities & investment research; Alternative Asset Management which includes private equity, infrastructure and real estate; Public Market Asset Management which includes mutual fund and IDFC Foundation which includes government advisory & program support services, policy advocacy, capacity building initiatives and community engagement.

IDFC offers investment banking services consisting of private and public placements of equity and debt capital and project advisory services; strategic corporate actions, such as mergers and acquisitions; senior debt financing in the form of loans or in the form of subscriptions to debentures; mezzanine products comprising preference capital and subordinated debt. Further, the Company manages mutual fund products for institutional and retail investors.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations8,138.598,772.049,639.829,035.73 10,458.18 
Expenses844.631,141.141,779.881,493.03  1,877.31  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)7,293.967,630.907,859.947,542.70  8,580.87  
Depreciation34.4030.96(61.30)62.38  148.62  
Finance Costs4,675.835,055.245,657.755,829.00  6,650.33  
Other income9.8317.9582.6528.08  9.54  
Exceptional items2,638.72  – 
PBT2,593.562,562.652,346.14(959.32)1,791.46  
Tax751.13738.46596.27(367.46) 482.87  
PAT (before Minority Interest and share of Associates)1,842.431,824.191,749.87(591.86) 1,308.59  
Profit/ (loss) attributable to Minority Interest8.0923.5220.79277.96  540.75  
Share of profit / (loss) of Associates(1.86)(2.01)22.1364.98  68.76  
Consolidated Profit / (Loss) for the year1,836.201,802.681,706.95(934.80) 699.08  

Profitability Analysis

Consolidated(%)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Operating Profit Margin Ratio89.6286.9981.5483.48 82.05 
Net Profit Margin Ratio22.6420.8018.15(6.55) 12.51 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Share Capital1,512.361,514.731,516.291,592.781,594.02
Share application money pending allotment0.600.300.122.225.66
Reserves & Surplus10,772.6812,167.8913,524.0215,681.738,508.97
Net worth (shareholders funds)12,285.6413,682.9215,040.4317,276.7310,108.65
Minority Interest17.7825.3940.1644.216,635.17
Long term borrowings29,837.2036,803.3339,320.0942,918.6943,184.88
Current liabilities18,565.7920,086.3820,076.8226,329.5016,681.24
Other long term liabilities and provisions270.55458.00681.87493.09995.33
Deferred Tax Liabilities2.183.293.666.0117.61
Total Liabilities60,979.1471,059.3175,163.0387,068.2377,622.88

 

Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Fixed Assets416.48344.45328.50426.54797.46
Noncurrent Investments2,433.113,309.253,888.2414,610.473,696.57
Current assets13,918.1916,783.9318,669.1022,308.5929,316.79
Long term advances and other noncurrent assets42,924.3949,267.5450,828.9448,014.2541,114.96
Deferred Tax Assets320.22397.05491.16751.291,740.01
Goodwill on consolidation (net)966.75957.09957.09957.09957.09
Total assets60,979.1471,059.3175,163.0387,068.2377,622.88

Efficiency Analysis

 
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
ROCE13.2114.4414.0313.0512.59
ROE / RONW12.6525.1711.999.88(5.85)

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations (Rs. Cr.)8,138.598,772.049,639.829,035.73 10,458.18 
Growth (%)28.44 %7.78 %9.89 %(6.27 %) 15.74 % 
PAT (Rs. Cr.)1,842.431,824.191,749.87(591.86) 1,308.59  
Growth (%)18.80 %(0.99 %)(4.07 %)(133.82 %) 321.10 % 
Earnings Per Share – Basic (Rs. )10.2412.1311.89(5.87)4.38  
Earning Per Share – Diluted (Rs. )12.0611.8810.91(5.87) 4.38 
Price to Earnings11.919.4914.17– 12.82 

Dividend History

The Company has maintained an average dividend yield of 1.74 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. IDFC’s average current ratio over the last 5 financial years has been 0.85 times which is satisfactory for a company which is primarily in the business of finance and lending.

Long Term Debt Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

IDFC’s average long term debt to equity ratio over the last 5 financial years has been 2.52 times which indicates that the Company operates with a very high level of debt. A high long term debt to equity ratio is normal for a Company which is primarily engage in the business of finance & lending.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

IDFC’s average interest coverage ratio over the last 5 financial years has been 1.56 times which is optimal for a Company which is in the business of finance and lending.

Ownership pattern

IDFC is a professionally managed company with no clear promoter group. Many large financial institutions hold varying amounts of stakes in the Company but no one in particular exercises significant influence in decision making. This gives the management enormous freedom and autonomy in diversification

In its latest stock exchange filing dated 31 March 2016, institutional holding in the Company stood at 80.85 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.