IDFC

The stock of Infrastructure Development Finance Corporation (IDFC) zoomed 9 per cent on Budget day. The company, one of the leading lenders in the infrastructure space, may be a key beneficiary of the Government’s thrust on the sector’s revival. Along with increasing allocations, the Budget has permitted banks to raise long-term funds for lending to the infrastructure sector with minimum regulatory requirements, such as SLR, CRR and priority sector lending.

This move will particularly benefit IDFC which was recently granted an in-principle banking licence by the RBI. Transforming into a bank would have hurt its profitability in the initial years due to the costs involved in meeting statutory requirements, priority sector lending and branch expansion. But now, IDFC may be allowed to fund infrastructure loans through bonds that do not carry such regulatory requirements. This can cushion the erosion in the company’s return on equity which was expected to dip to single-digits in the near term from 12 per cent in 2013-14.

In the long run, as the company transforms into a bank, expansion of its lending base will help in overcoming risks it currently faces due to exposure to a single segment. The benefits from low-cost current account and savings account deposits are also expected to accrue in the next three-four years. Even after the rally, the stock is trading at a comfortable 1.3 times its one-year forward book value.