IDFC Ltd. Rating: BUY BFSI. IDFC Ltd STOCK IDEA

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1 IDFC Ltd BFSI Date May 6, 2015 CMP (Rs.) 161 Target (Rs.) 200 Potential Upside 24% BSE Sensex NSE Nifty 8097 Scrip Code Bloomberg IDFC IN Reuters IDFC.BO BSE Group A BSE Code NSE Symbol IDFC Market Data Market Cap.(Rs. Cr) Equity Sh. Cap. (Rs Cr) Wk High/Low 187.5/107.5 Avg. Quarterly Volume Face Value (Rs.) 10 Shareholding Pattern (As on 31 st Mar 2015) FII 47.4 DII 30.0 Promoters 0.0 Public & Others 22.6 Total Comparative Price Chart May-14 Aug-14 Nov-14 Feb-15 May-15 IDFC BSE Bankex Atul Karwa Research Analyst atulkarwa@systematixshares.com Arun Gopalan VP Research & Investments arungopalan@systematixshares.com STOCK IDEA Rating: BUY Incorporated in 1997 on the recommendation of 'Expert Group on Commercialization of Infrastructure Projects' as a specialized financial intermediary for infrastructure IDFC has been a leading catalyst for providing private sector infrastructure development in India. The company has been largely engaged in the business of Merchant Banking, Asset Management, Private Equity and Stock Broking (through its subsidiary IDFC Securities). The recent in-principle approval from RBI has helped IDFC begin the process of transforming to a bank which is expected to start by Oct With its well diversified loan portfolio and improving asset quality, we expect IDFC to tap on that experience to excel in the business of retail banking. Though the banking foray brings with it the strain on funds due to SLR and CRR, we believe the growing infrastructure lending space will adequately compensate, making IDFC an attractive investment. Transformation from NBFC to a Bank: IDFC was awarded an in-principle approval for a banking license in Apr-2015 by RBI and it is currently in the phase of transforming from NBFC to a Bank. Every shareholder will be given 1 share of IDFC Bank for every share held in IDFC Ltd. Most of the business will be transferred to the new entity and IDFC Ltd will remain as a non-operative financial holding company (NoFHC). The demerger process is expected to be completed by Oct With superior capitalization levels (~23% Tier I Capital), quality management team (recruitment of key managerial personnel already done) and significant FII headroom (~23% in Oct 2015 in IDFC Bank), we believe there will be strong growth potential in IDFC Bank. Exemption from CRR, SLR and PSL to boost RoE: To encourage banks to provide long-term finance for infrastructure, RBI, in July last year, had exempted lenders from regulatory requirements such as CRR, SLR and priority sector lending. IDFC will have an exemption on 30% of its eligible infra loan book, subject to verification and certification by RBI. This exemption is likely to increase to 50-60% over the next three years. Given that 60% of the loans are provided for infrastructure projects, and that the loans qualify for exemption from SLR and CRR, a substantial amount will be available for lending, thereby boosting the NII. We believe the stock is in a sweet spot to take advantage of new norms on long term bonds, infrastructure lending in 5/25 scheme and new REITS norms. Asset quality to stabilize going forward: Loan provisioning by IDFC has increased 77% in FY15 to Rs 1055 cr against Rs 595 cr in the corresponding period last year. The sharp increase in provision is due to the risk arising from the stressed assets particularly in the energy and transport sectors. GNPAs increased from 0.56% in FY14 to 0.65% at the end of FY15. IDFC is creating a buffer to protect the bank balance sheet. The company is likely to keep up the high provisioning till it transforms into a bank. However, with the revival in economy and improved business environment we expect NPAs and provisioning requirement to stabilize from FY17 onwards. Strong contribution from non-interest income: Non-interest income contributes to ~1/3 rd of the total net income of the company. IDFC has an AMC, own investments and securities business which provide a basket of fee-based income. IDFC had total AUM of Rs cr at the end of FY15 of which Rs cr was MF AUM. IDFC earned management fees of Rs 440 cr in FY15 on its non-mf AUM of ~Rs cr and Rs 557 cr as principal gains and carry. We expect non-interest income to remain strong going forward. Valuation & Outlook: Transformation to a bank would put pressure on the profitability of IDFC in the short term due to regulatory requirement of maintaining SLR/CRR/PSL. However, relaxations given by RBI would act as a cushion to some extent. With a strong capital adequacy ratio, stable asset quality and FII headroom we expect the stock to do well in the medium to long term. At CMP of Rs 161 the stock trades at 1.3x of its FY17E ABV and we recommend a BUY with a target of Rs 200 implying a 24% upside. Particulars Loan Book (` Cr) Net Int Inc (` Cr) NIM (%) PAT (` Cr) PATM (%) EPS (`) Adj. BVPS (`) FY % % % FY15P % % % FY16E % % % FY17E % % % P/E (x) P/ABV (x) RoAA (%)

2 COMPANY BACKGROUND IDFC was incorporated on January 30, 1997 on the recommendations of the Expert Group on Commercialization of Infrastructure Projects and was listed on the stock exchange (BSE & NSE) in August Since its inception, the company has been providing loan to Infrastructure projects and also engaged in the business of Merchant Banking, Asset Management, Private Equity and Broking business through its subsidiary. As on 31 st December 2014, the company s Assets Under Management (AUM) was stood at Rs cr. The company has received many awards and recognition over the last few years. Recently, the company had got in-principle approval from the RBI to setup bank, which we believe that it may act as a growth driver in long term. IDFC comprises a portfolio of businesses to meet the various needs of infrastructure finance, corporate and individuals. Its business is organized in four SBUs: Corporate Finance: This SBU comprises project finance and fixed income and treasury and is the core of IDFC s business. Being an infrastructure finance company the company derives majority of its revenues from project loans in the infrastructure space or corporate loans to infrastructure companies. As of Dec % of the outstanding disbursement were for project loans and 32% corporate loans. Gross disbursements in FY14 stood at Rs cr and outstanding loan book was Rs cr, an increase of 6% over FY13. NII from loans grew by 5% in FY14 to Rs 2488 cr. The fixed income and treasury department which manages liquidity and investment and trading in debt instruments posted NII of Rs 216 cr, a growth of 8% and had treasury assets of Rs 9181 cr at the end of the year. Investment Banking and Broking: This business unit comprises advisory, capital raising services and institutional broking. It has a global client base and caters to a wide variety of investors including pension funds, long-only funds, hedge funds, mutual funds, banks, insurance companies and portfolio management firms. It earned revenues of Rs 77 cr in FY14. Alternative Asset Management: IDFC Alternatives Limited involves fund management across three asset classes: (i) Private Equity, (ii) Project Equity and (iii) Real Estate. It has average AUM of Rs cr in FY14 comprising of Rs 3866 cr in private equity, Rs 8363 cr in project equity and Rs 293 cr in real estate. It earned asset management fees of Rs 110 cr and capital gains of Rs 25 cr in FY14 as compared to Rs 114 cr and Rs 15 cr respectively in the previous year. Public Markets Asset Management: This is primarily IDFC s mutual funds business, which is operated through the IDFC Asset Management Company Limited ( IDFC AMC ). IDFC holds 75% stake and the balance stake of 25% is held by Natixis Global Asset Management, an international asset management group based out of France. Average AUM in FY14 stood at Rs cr (up 35% yoy) earning asset management fees of Rs 280 cr, an increase of 56% over previous year. The ratio of debt to equity of the AUM is 82:18. (Rs Cr) FY11 FY12 FY13 FY14 CAGR (%) NII (Loan) NII (Treasury) Inv Banking & Broking Alternative Asset Mgmt Mutual Fund

3 Key Management Personnel: Name & Designation Dr. Rajiv B. Lall Executive Chairman Mr. Vikram Limaye CEO Mr Sunil Kakar CFO Mr Vinayak Mavinkurve Group Head Project Fin. & Principal Investments Brief profile Dr. Lall has over 30 years' experience with leading global investment banks and multilateral agencies. His areas of expertise include project finance, private equity/ venture capital, intl capital markets, infrastructure and macroeconomic policy issues with a focus on emerging markets including India and China in particular. Dr. Lall has B.A. honors with Politics, Philosophy, and Economics from Oxford University and a Ph.D. with Economics from University of Columbia, USA. Mr Limaye has 25 years of experience working with Financial Institutions, Global Investment Banks, International Commercial Banks, and Global Accounting firms. He is a qualified CA and an MBA in Finance from University of Pennsylvania, U.S.A. Mr Kakar serves as the Group CFO-IDFC since He has earlier worked with Max New York Life Insurance Company since 2001, as CFO and Bank of America for 18 years. He holds an MBA in Finance from XLRI and a degree in engineering from IIT Kanpur. Mr Mavinkurve has about 2 decades experience in finance and the infrastructure sector and has been working with IDFC since Prior to joining IDFC, he worked with IFCI for about 3 yrs. He is an Electrical Engineer from VJTI, and has a Management degree from NMIMS.

4 Sectorwise Disbursement Productwise Disbursement Telecom 23% Others 13% Energy 41% LAS 1% Corporate Loans 34% Eq/Pref Shares 4% Others 1% Transportatio n 23% Project Loans 60% Borrowing Profile Borrowing - Lenderwise FC Loans 13% CBLO LT Rupee 6% Short Term Sub Debt Loans Others 18% 1% 7% 10% Banks 18% LT Bonds / Debn 62% Pension & PFs 23% FII/DII/ECBs 17% Insurance Comp 10% MFs 15% NII & Growth PAT & Growth FY13 FY14 FY15P FY16E FY17E FY13 FY14 FY15P FY16E FY17E NII (Rs Cr) Growth (RHS %) PAT (Rs Cr) Growth (RHS %)

5 FINANCIAL PERFORMANCE PROFIT & LOSS (Rs Cr) RATIO ANALYSIS Particulars FY13 FY14 FY15E FY16E FY17E Particulars FY13 FY14 FY15E FY16E FY17E Interest Income Return Ratios Interest Expenses Avg yield on advances 12.0% 11.6% 12.1% 11.9% 11.6% Net Interest Income Avg cost of borrowings 9.3% 9.1% 9.2% 8.4% 8.3% Non interest income NIM 4.5% 4.5% 4.2% 4.4% 4.3% Operating Income RoAE 14.2% 12.7% 10.8% 10.0% 10.1% Operating Expenses RoAA 2.8% 2.5% 2.2% 2.0% 2.1% PPP Prov & Cont Asset Quality Ratios Profit Before Tax Gross NPA to Advances 0.2% 0.6% 0.7% 1.0% 1.0% Tax Net NPA to Advances 0.1% 0.4% 0.2% 0.5% 0.4% PAT Provision Coverage 66.0% 33.8% 66.6% 50.0% 60.0% Adj. PAT Growth Ratios BALANCE SHEET NII 21.3% 5.5% -2.6% -8.6% 3.5% Particulars FY13 FY14 FY15E FY16E FY17E PAT 18.7% -1.0% -4.1% 2.0% 9.2% Share Capital Advances 14.0% 5.3% -10.5% 5.0% 8.0% Reserves & Surplus Total Shareholder funds Valuation Ratios Borrowings EPS Other Liab & Prov P/E Adj. BVPS SOURCES OF FUNDS P/ABV Cash & Bank Balance Other Ratios Investment Cost-Income 15.1% 14.6% 17.4% 18.4% 18.9% Advances Dividend Yield 1.6% 1.6% 1.6% 1.6% 1.6% Fixed Assets Other Assets TOTAL ASSETS

6 DISCLOSURES/ APPENDIX I. ANALYST CERTIFICATION I, Atul Karwa, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report, (2) No part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report by Systematix Shares & Stocks (I) Limited or its Group/associates companies. (3) has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. Disclosure of Interest Statement Response Analyst holding in the stock No Served as an officer, director or employee No II. ISSUER SPECIFIC REGULATORY DISCLOSURES, UNLESS SPECIFICALLY MENTIONED IN POINT NO. 9 BELOW: 1. 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