The Hindu Business Line : IDFC: Buy

The sharp de-rating of Indian financials over the past quarter has seen the IDFC stock lose over 33 per cent in value to its current Rs 154 levels. With a business portfolio that spans infrastructure funding, private equity, investment banking and asset management, a portion of IDFC’s earnings are no doubt vulnerable to domestic slowdown as well as turbulent stock markets.

However, such a slowdown appears to be already priced into the stock’s valuations. At the current market price, IDFC trades at about 24 times its earnings and less than 4 times its book value for FY08, down from its peak valuations of 36 and 6 times, respectively. The company appears well placed to deliver a 30 per cent-plus growth in earnings over the medium term, making it an attractive ‘buy’ for investors with a three-year perspective.

A well-entrenched position as a private lender to domestic infrastructure projects, a loan book that is focused on the high potential energy, transport and telecom sectors, and an ability to quickly scale up in size, have helped IDFC attain a balance sheet size of Rs 25,903 crore, even as net interest margins remained stable, with net NPAs contained at zero. Though disbursals may slow from the scorching 50 per cent growth from here on, a 30-per cent annual growth appears possible given IDFC’s headroom on increasing leverage.

IDFC has added to its fee-based income by expanding into private equity, investment banking and asset management. Fee income from IDFC-SSKI, a 79.8 per cent subsidiary, has been instrumental in the doubling of non-interest income in the first nine months of 2007. Advisory, investment banking and broking fees, though lumpy in nature, offer substantial scope for scaling up.

While choppy debt and stock markets may pose a challenge for this business, they present an attractive opportunity for IDFC’s private equity arm, which raises and manages funds that invest in infrastructure companies. Despite temporary delays in fund-raising, this business appears to be well-placed to expand assets three-four fold by 2010, from the current base of Rs 2,700 crore. This will add to earnings by way of management and performance fees.

IDFC has also recently acquired the mutual fund business of Standard Chartered AMC. StanChart’s strong performance record in both debt and equity, potential for manifold expansion in equity assets and the high scalability and investment returns offered by the AMC business, all suggest that this buyout would add a stable earnings stream to IDFC’s portfolio over the next 3 years.

Aarati Krishnan

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