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Suresh Krishnamurthy

SHAREHOLDERS of IFCI can continue to hold the stock. The company's financial profile is set to improve, thanks to such measures as infusion of grants by the Government and the reduction in interest costs. This could considerably strengthen IFCI's financial health.

However, further stock price gains are predicated on an improvement in the bad loan situation.

If the large loan loss provision in 2003-04 first is any indication, the bad loan situation may be on the mend. Signs of an improvement in the economy also augur well.

Still, investors would need to consider the financial performance of IFCI in the next two quarters before deciding their investment stance.

Bad to worse

IFCI's performance turned from bad to worse in 2003-04 first half, necessitating a restructuring of its financial structure.

Operating profit (operating income less interest expenses), which had turned positive in the last two quarters of 2002-03, is now negative.

This means that on deployed funds, IFCI is earning less by way of income than it has to pay to its lenders. Importantly, the operating profit was negative despite sizeable contribution from profit on sale of investments.

In addition, a large provision of more than Rs 700 crore for bad loans made things look worse.

There is also a charge of Rs 495 crore, which was treated as income in 2002-03, as the Government rejected IFCI's request to consider this as a grant. These issues ensured that in the first half of 2003-04, IFCI's losses ballooned to Rs 1,350 crore. This led to a rise in IFCI's negative net worth to Rs 1,626 crore, effectively ensuring the need for cash infusion by the Government.

Large grants

According to the financial results published by IFCI, the Government is set to grant sops worth about Rs 4,700 crore to IFCI.

This would lead to a significant change in the company's net worth and debt-equity ratio. In addition, the rise in stock prices has inflated the value of the equity portfolio. These gains when realised will also boost net worth.

One-time infusion of these grants and gains will convert the operating loss into profits.

However, infusion is likely in phases and this will reduce the benefits accruing to IFCI in the near-term.

What is promising in the near-term is the restructuring of interest payable on its debt.

Financial institutions and banks holding IFCI securities have agreed to reduce the interest on their securities to 6 per cent and extend the term to maturity to 20 years. High interest bonds such as IFCI's Millennium bonds are also being repaid in this quarter.

In addition, if provident funds accede to IFCI's request to reduce rates, then significant reduction in interest cost is possible.

This could ensure that IFCI turns the negative spread (the difference between interest income and interest expenses) on the funds deployed into positive.

Positive net worth

The stock now trades at Rs 18. Considering the expected grant of Rs 4,697 crore, the net worth would work out to about Rs 3,070 crore, or a book value per share of nearly Rs 48.

When the operations of IFCI stabilise and the return on net worth rises, the returns to shareholders would be significant.

However, the large size of bad loans stymie the improvement in profitability or if it happens, over a long period. As at end-March 2003, net non-performing assets were about Rs 4,600 crore. This is higher than the net worth of IFCI even when adjusted for capital infusion.

Further, deterioration in the quality of loans can put paid to any hopes of improvement in profitability.

As such, it would be prudent to wait for IFCI's performance in the next two quarters to find out if profitability can improve.

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