Interesting times ahead for IDFC

SMARTSHARE

In 2003, and 2004, IDFC was in the news for entirely the wrong reasons. There was talk of merging the FI with State Bank of India.

There were credible rumours that somebody senior in the NDA hierarchy was determined to clip IDFC's wings: the merger didn't make sense otherwise. The board and chairman resigned, causing uncertainty until the merger was cancelled.

This time, the FI is in focus for the right reasons. Post-IPO, the GoI will have an extra Rs 250-odd crore from disinvestment in its kitty. More importantly, the GoI's stake will drop to around 23 per cent from its current 35 percent. That should reduce the chances of future political interference.

The corporation's operating segment is infrastructure. It concentrates on infrastructure financing and it offers advisory services. Both are growth areas and both have their share of problems.

Infrastructure projects are massively capital-intensive, subject to vast delays, plagued by unpredictable political interference and long-gestation. Financing infrastructure involves the acceptance of high-risks over long periods.

Precisely because of the above difficulties, specialists are in high demand. It takes good risk-assessment ability to even take a call on project-viability. And, it takes a lot of know-how and experience to structure a project and financing in a fashion appealing to investors.

IDFC has that know-how and it's much in demand in a scenario of vast infrastructure development plans in various sectors spread across the entire country.

IDFC is also innovative and a market leader with ambitious plans of enabling more private-public partnerships and of tapping retail funding through the flotation of specialised infrastructure development mutual funds.

If those plans come to fruition and enough projects prove viable, IDFC will ride the gravy train for years to come. If however, some big projects prove unviable, IDFC will be squeezed into extinction. Either way, we won't know for a long time.

As such, IDFC has decent financials. Its net loan exposure has grown at a CAGR of almost 50 per cent over the last five years. The return on assets is around 4.5 per cent, which is good. The net NPAs are zero, which is absolutely amazing.

The loan exposure is spread across energy (34 per cent), telecom (27 per cent) and roads/transportation (26 per cent) with fee-based income (3-4 per cent) accounting for the rest of revenues.

This means that, if the power sector is cleaned up as scheduled, IDFC will breathe a lot easier. The parameters of the telecom and road/transportation sectors are reasonably clear and there shouldn't be unforeseen problems with such projects.

The IPO offers 403.6 million equity shares of Rs 10 each in a band of Rs 29-34 per share. This could raise Rs 1,170.44 crore to Rs 72.24 crore.

A fresh issue of 120 million shares will be made and 280 million shares will be sold by existing shareholders. The total issue size is about 35 per cent of post-IPO equity. The proceeds will meet capital adequacy requirements (CAR) and finance more projects.

The existing shareholders include the GoI, IDBI, and multi-laterals like the ADB and IFC as well as ICICI Banking Corp, SBI and other Indian FIs. Post-issue, the multilaterals will hold a total stake of 25 per cent.

Is it worth bunging in an application? Cynically, IDFC has clout enough to ensure over-subscription and the share might list at premium. That's an incentive to go stag. The long-term prospects are unclear. But if India's infrastructure does improve, IDFC will do well.