The Hindu Business Line : IDFC: Buy

FRESH investments in the stock of IDFC can be considered. The stock trades at a premium to most finance and banking firms. The valuation, however, is justified considering the growth prospects for the company.

IDFC has emerged as one of the major players in the infrastructure financing business. Its business growth over the past few years has been about 40 per cent.

This growth has come without any deterioration in the quality of the loan portfolio. Bad loans, after provisions, are close to zero.

The profitability parameters of IDFC are among the best in the banking business. Operating costs are considerably low compared to that of competitors such as banks. The return on average assets at close to 3 per cent is higher than that of HDFC, the most profitable finance company in India.

In the first quarter, IDFC's net interest income rose by about 16 per cent and sustainable profits by nearly 15 per cent. In terms of lending activity, however, the first quarter was not one of IDFC's best.

It disbursed Rs 778 crore in the three months against Rs 3,739 crore in FY 2005. The run-rate in terms of approvals for fresh projects, however, continued to be impressive.

The robust rate of approvals indicates that disbursement growth in FY 2006 will remain high notwithstanding the sluggishness in the first quarter. In FY 2005, disbursements grew 38 per cent and over the past five years the annual growth has been about 58 per cent.

Given the expected resurgence in infrastructure investments over the next five years, the long-term prospects are also bright.

Investments into IDFC also provide exposure to venture capital funding. IDFC's investment book, at about Rs 450 crore, works out to nearly 5 per cent of its total assets.

IDFC had invested in such companies as Bharti Tele-Ventures, Gateway Distriparks, Indraprastha Gas, Power Trading Corporation and Jet Airways. These venture capital investments have paid off and IDFC is sitting on sizeable unrealised gains.

Venture capital funding is an attractive proposition for a resource-starved country such as India. It could add to the returns generated by the lending business.

The IDFC stock trades at a price to earnings multiple of nearly 30 times its sustainable earnings. The valuation is not out of line considering the growth prospects.

For instance, the net worth of IDFC is about Rs 2,500 crore. If we apply a return on net worth of 25 per cent, then earnings per share would be nearly Rs 5.50.

The price to earnings multiple would then be only about 13. A return on net worth of 25 per cent is eminently achievable considering that IDFC's profitability is better than most other banking firms.

Also, as the company is flush with funds, business growth will not need equity expansion, unlike other banking firms. This renders valuation of the stock even more attractive.

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