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The stock of Infrastructure Development Finance Company (IDFC), a leading lender, fell 36 per cent in the last eight months on concern that its transformation into a bank would hurt profitability.
Delays in project execution and lack of fresh investments have also significantly diminished the company’s pipeline of loans in the last couple of years. At the current price of ₹96, the stock is trading at just 0.9 times its estimated 2015 book value, well below its five-year average of 1.9 times.
The fall presents a good buying opportunity for investors. IDFC continues to be an excellent low-risk proxy for the infrastructure sector. While an entry into banking may reduce the company’s return on equity in the near term, it will also diversify risks by expanding IDFC’s lending and deposit base.
IDFC expanded its loan book by 33 per cent annually from 2009 to 2012, a testimony to its established presence in infrastructure lending.
With the government clearing projects worth ₹38,750 crore in the last six months, IDFC is well placed to benefit from an accelerated investment cycle over the next 18-24 months.
Almost 40 per cent of IDFC’s lending is to the energy sector, where the government’s proposed power sector reforms can turnaround the fortunes. Sectors such as transportation and telecom constitute 24 and 21 per cent of the loan book respectively. There is now more regulatory clarity on spectrum pricing and this should bode well for IDFC.
As of the December quarter, the total loan book stood at ₹54,552 crore, almost flat over the last one year. While loan growth may remain muted in the near term, we expect lending to pick up and grow by 7 per cent in 2015, and then scale up to 13 per cent in 2016.
Slippages within limits Slippages in asset quality have also been well within the limits expected by the management in the beginning of 2013-14.
Even after increasing manifold, the gross non-performing assets as a proportion of loans are at 0.6 per cent for IDFC. The company has also provided for such bad loans adequately, with provisions at about 2 per cent of total loans.
On the profitability front, lending to low-risk corporates and focussing on refinancing have lowered net interest margins (NIMs). But IDFC has been able to maintain its NIMs broadly between 4-4.2 per cent.
IDFC’s subsidiaries in asset management and private equity also add value to the stock. The subsidiaries alone can be valued at ₹25 per share.
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