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IDFC – Stock of the Month (October 2014)

16 September, 2014

Price: Rs. 145.60

IDFC Limited (“IDFC“or the “Company“) is an integrated infrastructure finance player providing end to end infrastructure financing and project implementation services. The Company was formerly known as Infrastructure Development Finance Company Limited and changed its name to IDFC Limited in July 2012. The Company’s existing business is currently classified into the following four broad platforms:

►        Project Finance, Fixed Income and Treasury

►        Investment Banking and Institutional Broking

►        Public Markets Asset Management

►        Alternative Asset Management.

INVESTMENT RATIONALE

Diversification – Banking Business

On April 9, 2014, IDFC has got an approval to set up a domestic private sector bank under the RBI New Banks Licensing Guidelines. The Company on the back of its infrastructure finance experience, strong relationship with government entities and customers, can gain access to low-cost funds in the form of low-cost savings and current account deposits, and can diversify its revenue stream. The Company also seeks to create a strong retail assets portfolio and increase its liquidity by creating an extensive bank deposit and customer base. IDFC’s proposed banking business operations structure is expected to include four distinct strategic business verticals:

►        Corporate Banking – for large corporate and institutional customers

►        Commercial Banking – largely cover mid-level corporate, both listed and unlisted

►        Consumer or Retail Banking – CASA deposits as well as lending to retail consumers

►        Inclusion Banking – priority sector lending operations comprising of the rural, agricultural and MSME segments

We believe the improving macro-economic conditions and the regulatory environment for the banking industry in India will facilitate the Company’s foray into banking operations.

Robust financial performance

IDFC

IDFC has shown consistent growth over the last ten years (i.e. 2004-05 to 2013-14). It’s net revenue from operations over this period grew at an impressive CAGR of 28.29 %. For FY 2014, income from operations increased by 7.78 % to Rs. 8,772.04 Cr. from Rs. 8,138.59 Cr. and EBITDA increased by 4.62 % to Rs. 7,630.90 Cr. from Rs. 7,293.96Cr. The Company also has a consistent dividend history over the last 10 financial years. The Company’s robust financial performance has provided the opportunities to diversify business operations across the financial sector, creating long term value for the shareholders.

Integrated financial services platform

The Company offers a wide range of financing solutions to customers. The Company has developed a diversified suite of customer-centric products and services to address the complex advisory and financing needs of the Indian economy, particularly the Indian infrastructure sector. In addition, the Company’s has expanded its operations to include asset management comprising both mutual fund management and alternative asset management, investment banking business comprising debt syndication, equity capital raising, and merger and acquisitions. The diversified portfolio of products helps the company to cater to the different investment needs of both institutions and individuals.

INVESTMENT CONCERNS

Significant Exposure to Certain Sectors

As of March 31, 2014, the Company has a significant exposure to 3 sectors namely energy, telecommunications and transportation. These sectors account for 87.42 % of company’s loan amount of Rs. 77,621 Cr of which energy sector has a share of 37%, followed by telecommunications 28% and transportation 22%. Any negative trends or adverse developments in these sectors, particularly those that may affect the large corporate borrowers and industrial groups, may increase the level of non-performing assets in the portfolio and adversely affect the business and financial performance.

Intense Competition

IDFC faces an intense competition with public sector banks, private banks (including foreign banks), financial institutions and other NBFCs.  There are number of factors which contribute to the competitive environment of the Company including government policies, entry of new players, and large balance sheet size of competitors/peers. In such a competitive environment, the main challenge is to get funds at an effective cost that is comparable to or lower than the competitors, which can enable IDFC to offer competitive interest rates for its infrastructure loans. If the Company is unable to compete effectively i.e. unable to offer low interest rate, this may adversely affect the financial performance of the Company.

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.