IDFC

Fresh investments can be considered in the stock of IDFC, an infrastructure financing company that also provides equity funding, asset management, investment banking and broking services.



The company's loan book, which expanded by 17 per cent from March 31, 2010 to July 31, 2010 alone, is expected to grow at a strong pace over the next few years, with insatiable demand from the infrastructure sector.

In addition, IDFC's new “infrastructure financing company” status will allow it to borrow higher amounts from banks, raise infrastructure bonds (with tax deductions) and tap external borrowings to diversify. This may help maintain spreads even as interest rates begin to edge up.

IDFC recently raised Rs 3,500 crore through QIP and convertible preference shares which would help fund the balance sheet growth in the near term. The core capital ratio assuming conversion of preference shares, may be more than 25 per cent. At the current price of Rs 181, the stock is trading at two times its estimated FY12 adjusted book value and 16 times its estimated FY12 earnings. A strong return on assets ratio of 3.4 per cent for the year-ended June 30, 2010, capital to support loan book growth, superior credit quality and high non-interest income contribution (44 per cent of the revenues) are the key positives. IDFC's loan book grew at 30 per cent over the period FY06-10.

The potential for infrastructure funding is huge with the private sector expected to spend Rs 6.19 lakh crore in the Eleventh Five Year Plan. In addition to the incremental demand, there is another Rs 19,000 crore on IDFC's books sanctioned and yet to be disbursed.

IDFC's current loan book and disbursements are diversified with 39 per cent contributed by the energy sector followed by 26 per cent by telecom and 18 per cent by the transport sector. The contribution of both energy and telecom improved year-on-year, the latter due to 3G and Broadband Wireless auctions.

IDFC's current borrowing profile shows a lower proportion of rupee loans (16 per cent) therefore unlike other NBFCs, the impact of base rate implementation would be muted. Bonds and debentures make up 61 per cent of the overall fund base.

The duration of assets and liabilities are evenly matched allowing IDFC to handle interest rate volatility better. The spreads for the latest quarter stood at 2.7 per cent, having improved year-on-year. Volatile revenues of broking and principal investments led to choppy fee income growth. Recent equity infusion may not be dilutive as earnings may grow at a faster rate. Risks:

Fee income is highly dependent on the performance of equity markets. Any delay in execution of the projects may put pressure on asset quality.