The company is expected to witness higher loan growth and fee-based income.
IDFC is back on track in 2009-10, largely led by traction in fee-based income, though core business also showed improved performance. Net interest income from infrastructure lending maintained last year’s growth rate of 34 per cent year-on-year (y-o-y), aided by improved net interest margins of 2.8 per cent. Non-interest income rose 55 per cent to Rs 950 crore after falling marginally in 2008-09 due to increase in the equity book, jump in assets under management (led by mutual funds) and strong momentum in capital markets. Net profit rose 42 per cent to Rs 1,062 crore, as provision for loans declined 15 per cent due to near-zero non-performing assets.
IDFC’s balance sheet size grew 13 per cent to Rs 33,562 crore — almost double the growth rate of 7 per cent clocked in 2008-09 — as loan book expanded 21.5 per cent to Rs 25,000 crore. Gross approvals tripled, while gross disbursements jumped 60 per cent, mainly on account of a lower base of last year.
The widening gap between disbursements and approvals — Rs 17,480 crore in 2009-10 from Rs 2,232 crore in 2008-09 — means higher loan book growth in future, boosting chances of net interest income from the core business. However, it is worth looking at whether the company can sustain 2.8 per cent net interest margins in a rising interest rate scenario. IIFL’s analysts note, “With the anticipated rise in interest rates, we expect spreads to come under pressure, as IDFC remains 100 per cent wholesale funded.”
Introduction of a new category of infrastructure finance companies (IFCs) by the Reserve Bank of India and relaxation of exposure limits for bank lending to IFCs (up to 20 per cent of its capital funds) will lead to better funding costs and improved net margins and return on equity.
After outperforming the Sensex significantly in the past one year, analysts are advising investors to either hold or accumulate the stock, given high valuations of 2.6 and 2.3 times estimated price to book value for 2010-11 and 2011-12, respectively.
