Infrastructure Development

Transcription

1 Initiating Coverage Report Infrastructure Development Finance Company Ltd. - On a restructuring mode - On a restructuring mode Theme for growth Branch expansion Capital Infusion Restructuring the balance sheet profile Buy PRICE TARGET INR148 Analyst - Sanjeev Jain Phone Id - sjain@microsec.in 01

2 Contents Pages 02

3 BUY Infrastructure Development Finance Company Ltd. Sector- NBFC Infrastructure Development Finance Company Ltd.(IDFC) provides end to end infrastructure financing and project implementation services. IDFC provide financial assistance across various segments like Roads, Power, Telecommunication, Information Technology etc. In June 2010, the company was amongst the first to get the Infrastructure Finance Company (IFC) status. Apart from infrastructure finance business, the company also engaged in Merchant Banking, Asset Management, Private Equity and Broking business through its subsidiary. On 2 nd April 2014, the company had got in-principle approval from the RBI to set up a Bank, which we believe that it may act as a growth driver in long term. Investment Rationale Key beneficiary of Government s infrastructure revival plan Diversified loan portfolio Asset quality likely to improve More opportunity to increase loan book size Diversified liability franchise Rising Net Interest Income (NII) Net Interest Margin (NIM) is to improve Strong capital base Profitability continues to remain healthy Growing profitability boosted Return ratios Operationally efficient Infrastructure Finance Company 03 Source: Company, ACE Equity,

4 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. It is a conglomerate of 10 direct subsidiaries and 11 indirect subsidiaries. IDFC Foundation includes three Joint Ventures and two trusts. As on 31 st December 2014, the company s average Assets Under Management (AUM) was stood at INR52597 crores and its balance sheet crossed over INR70000 crores. The company has received many awards and recognition over the last few years. Recently, the company had got inprinciple approval from the RBI to set up bank, which we believe that it may act as a growth driver in long term. Milestones Got in-principle nod to set up Bank Entered into strategic partnership between IDFC & Natixis Global Asset Management Classified as an Infrastructure Finance Company (IFC) Became part of Nifty Acquired the AMC business of Standard Chartered Bank in India 2009 Listed in BSE & NSE Source: Company,

5 IDFC Business Structure Corporate Investment Banking Alternative Asset Management Public Market Asset Management IDFC Foundation Project Finance Fixed Income & Treasury Private Equity Government Advisory & Program Support Services Investment Banking Infrastructure Real Estate Mutual Fund Policy Advocacy Capital Building Initiative Securities & Investment Research Community Engagement 05 Source: Company,

6 Board of Directors & Management Dr. Rajiv B. Lall EXECUTIVE CHAIRMAN Vikram Limaye MANAGING DIRECTOR & CEO A.K.T. Chari ADVISOR- PROJECT FINANCE Sunil Kakar GROUP CHIEF FINANCIAL OFFICER Sadashiv S. Rao CHIEF RISK OFFICER M.K. Sinha MANAGING PARTNER & CEO Satish Mandhana MANAGING PARTNER & CIO Naval Bir Kumar VICE CHAIRMAN, IDFC MUTUAL FUND Vinayak Mavinkurve Sanjay Grewal GROUP HEAD PROJECT FINANCE & PRINCIPAL INVESTMENTS GROUP HEAD-PROJECT FINANCE Cherian Thomas CEO - IDFC FOUNDATION Animesh Kumar Dr. Rajeev Uberoi K. Rajagopal GROUP HEAD- HUMAN RESOURCES & CORPORATE SERVICES General Counsel and Group Head-Legal & Compliance Head - Fixed Income & Treasury Ajay Mahajan GROUP HEAD - NEW INITIATIVES Avtar Monga Chief Operating Officer 06 Source: Company,

7 Economy Review & Outlook The Indian economy is witnessing a challenging phase on the growth aspect. The decelerated Indian GDP growth at 4.7% in Q3FY14, clearly reflected the unfavorable environment of the Indian economy. A persistent high inflation which led to high interest rates has jeopardized the Indian economy which in turn affected the entire capital intensive industry. The weakened domestic economic conditions combined with the Government policy paralysis have stalled a number of big infrastructure projects from being implemented, which has posed big challenges to the Indian Banks as well as Infrastructure finance companies. Consequently, the financial of Indian companies has been affected and dented their ability to repay their loan, which has been clearly reflected in the loan books of Indian Banks as well as NBFCs specially infrastructure finance companies. However, India recorded a trade deficit of 8.1 billion USD in February 2014 as compared to 9.93 billion USD in January 2014, it was mainly, due to a sharp decline in imports led by a fall in gold imports. On the fiscal deficit front, the Government has targeted FY14 fiscal deficit at 4.6%. In order to achieve this, the Government has revised its FY14 planned expenditure down by ~(14%) to INR crores, whereas, Net tax revenue collection revised down by ~(5.4%) to INR crores and non tax revenue collection up by ~12% to INR crores. However, the slower growth rate of Indian economy along with the poor performance of Indian corporate and the vulnerable INR against major currencies have weakened the revenue outlook for the rest of the year. A lower fiscal deficit happens is generally good for the nation, however, it is important to see that on what front (Revenue or Expenditure) the Government has taken the measure to do so. The current scenario, a reduction in planned expenditure may impact the business growth of the Indian capital intensive industry as well as BFSI. Need of the hour There is a need for a fast solution of the issue of stalled projects in which the Banks and NBFCs have a significant exposure. The new Government should focus on the investment front and should come out with attractive schemes like subvention on interest rate on timely payment of loan or fast execution of projects, setting up sector wise interest rates etc, for the respective manufacturer that may help removing the bottlenecks of the supply side. Consequently, the nation s Current Account Deficit (CAD) and Fiscal Deficit may come down which may not only help in rupee appreciation against the USD but also improve the balance sheet of Indian corporate as well as Indian Banks. Outlook We believe moderate global economic recovery and the measures taken by the government is likely to revive domestic growth. Inflation, Current Account Deficit (CAD) and Fiscal Deficit have shown some improvement. Indian rupee may appreciate owing to various steps being taken by the Government and the RBI. The steps taken for the revival of investment, including progressive infrastructure de-bottlenecking is likely to increase capacity expansion and improve the ability of Indian companies to repay their loan. The infrastructure finance companies as well as Banks which are better placed are likely to generate better business and returns as the economy shows resilience of all the measures being taken. 07

8 India s GDP growth rate Weak Industrial Production 0.1% India s Fiscal Deficit India s Trade Deficit India s WPI Inflation India s CPI Inflation 8.1% 4.68% 08

9 INR vs. Dollar Government of India 10 year bond yield th April th April th April th April 2014 India's Manufacturing PMI Trend 09 Source: Company, Bloomberg, ADB,

10 Investment Rationale Key beneficiary of Government s infrastructure revival plan The past couple of years has been challenging for the Indian economy. Domestic savings and investments have plummeted and also, private investment in infrastructure has come to a standstill. It is mainly, because of the number of headwinds from domestic and global front. Number of big infrastructure projects has been stuck due to government policy uncertainties. However this time round, the Government and regulator have taken number of measures to boost the economy, which is likely to generate capacity expansion. Moreover, we believe, whichever government will come into power after the ongoing Lok Sabha election may try to improve the economic growth by boosting infrastructure sectors, which may not only improve the confidence of the big players but also improve the financial health of the Indian Banks and NBFCs. The companies which are in better shape are likely to generate better returns. IDFC behemoth business structure and diversified business portfolio positions it to take the standing opportunity at that time. During 12 th five year plan, the Government has set a target of 1 trillion USD of investment of large projects in infrastructure across various segments like Telecom, Roads, Power etc and expected half of which may come from private players. However, due to the global and domestic headwinds along with policy uncertainties has eroded the confidence of private players to bet on this sector, which has affected the financial of Indian Banks and NBFCs. However, IDFC s strong risk management ability and well understanding of emerging challenges and opportunities helped the company to maintain its financials. We believe, the new and stable government may try to pull out the confidence of private players by coming out with the investor friendly scheme related to fast execution of projects and also try to fulfill the committed investment as per the 12 th five year plan. Consequently, it may improve the cash flows in the sector and improve the financial of Indian Banks and Infrastructure financing companies. As IDFC s has an unmatched knowledge of the sector and also, its is one of the leading infrastructure financing companies may reap a huge benefit going forward. Government s 12th Five Year Plan ( ) USD Billion 10

11 Diversified loan portfolio IDFC s diversified loan portfolio makes the companies more vibrant and dynamic. Its diversified loan book helps the company to increase its risk absorption capacity by hedging against the risk of slowdown in specific sectors unlike its peers REC, PFC which are focused only on power sector. IDFC s has an unmatched knowledge and presence across the various segment like Energy, Transportation, Telecom etc, which gives the company more opportunity to expand its business across these segments as per the performance of the sectors. IDFC s Diversified loan portfolio (31st December 2013) Product wise OS disbursement as on 31st December 2013 (INR Crs.) 11 Source: Company, ACE Equity,

12 Asset quality likely to improve Despite challenging environment over the past few years, wherein, the Indian Banks as well as NBFCs are suffering from asset quality problems, IDFC has been able to improve its asset quality. In FY13, the company has reported 15 and 10bps improvement in its GNPA and NNPA to 0.15% and 0.05% respectively. However, in Q3FY14, owing to the poor economic growth, the company has reported 0.65% and 0.50% GNPA and NNPA respectively. We are not seeing any upside in its NPA level from here back by the expectation of revival in the economy couple with the fast execution of stalled projects after the formation of new government and also the Banking business will give it opportunity to focus more towards less riskier and retail segment. The company may improve its GNPA and NNPA going forward. Its GNPA and NNPA may go down to 0.62% and 0.45% in FY16E. The company s strong and diversified business model and well understanding of emerging challenges and opportunities couple with strong risk management with in-depth analysis of borrowers profile may enable it to improve its asset quality. IDFC s asset quality trend Quarterly asset quality trend Asset quality comparison with the company s peer 12 Source: Companies,

13 More opportunity to increase loan book size As on 31st December 2013, IDFC has a leverage (Asset/Networth) of 4.59x which gives much room to the company to expand their loan book size and also impress the credit rating agency. However, slowdown in the economy and the company s conservative approach for the loan financing has lowered its advance growth rate. As on 31st March 2013, the company s total advance stood at INR56618 crores, grew by 14% YoY. We anticipate 1% YoY growth in advance for FY14E due to the company s conservative approach and slowdown in the economy. We believe economy may start improving from the last quarter of the current financial year and also, the new and stable government may try to boost the infrastructure sector which may help the company to expand their loan book size. For FY16E, we anticipate ~22% YoY growth in its loan book. IDFC s advance growth rate IDFC s impressive leverage multiples 13 Source: Company, ACE Equity,

14 Diversified liability franchise IDFC s diversified liability profile and less dependence on Banks gives it an opportunity of low cost of capital which has not only positioned the company to get strong credit rating and but also improved its margin and also, differentiates it from other NBFCs which substantially rely on Banks borrowings and assignments. As on 31st December 2013, the company s total borrowing stood at INR51630 crores. The company has reduced its Banks funding by 400bps YoY to16.1% as against 20.1% in the same period last year. Moreover, owing to the poor demand and weak economic condition, the company has also reduced its share in Bonds and Debentures in its total borrowings by 700bps YoY to 66% as against 73% in the same period last year. The following graphs depict the company s strong borrowings profile. Borrowings-lender wise 31 st December st December 2013 Borrowings-Instrument wise 31 st December st December Source: Company,

15 Rising Net Interest Income (NII) IDFC has consistently maintained its Net Interest Income (NII) growth rate over the past few years. The company has reported ~25% CAGR growth in its NII over the period of FY However, in 9MFY14, the company has reported ~6% YoY growth in its NII. It was mainly, because of the slowdown in the economy which led to mounted pressure on the company to take conservative approach to give loans. We anticipate ~15% CAGR growth of NII over the period of FY The company s strong business model, diversified funding mix and the expectation of revival in the economy going forward supported our valuation. IDFC s NII growth trend Interest Income/Total Assets is on the rise 15 Source: Company, Ace Equity,

16 Net Interest Margin (NIM) is to improve Net Interest Margin Trend IDFC s diversified funding mix helps it to mobilize funds at competitive rates. Inexpensive liabilities mix has enabled the company to maintain its NIM healthy from the last few years. However, this time round there is marginal pressure on company s NIM due to high rate of interest led by high inflation. We believe the company s cost of funding (which comprises of Pension & PFs (~21%), FIIs/DIIs/ECBs (~19%), Banks (~16%), Insurance Companies (~14%), Others (~16%) and Mutual Funds (~13%) of total funding mix as on December 31, 2013) is likely to decline backed by the expectation of downside reversal in the monetary policy cycle couple with INR appreciation against major currencies. The company s diversified loan portfolio and funding mix may aid margin going forward. We anticipate that company may maintain its margin of 3.9% over the next couple of years. Rolling 12 months reported Net Interest Margin trend 16 Source: Company, Ace Equity,

17 Strong capital base IDFC is in well position to support its growth trajectory. As on 31 st December 2013, its Capital Adequacy Ratio (CAR) stood at 24.80% out of which, Tier-1 capital strongly stood at 22.50% which is well above the benchmark regulatory requirement and also it is the highest amongst its peers. The company actively manages its capital to meet regulatory norms and current and future business needs considering the risks in its businesses, expectation of rating agencies, share holders and investors, and the available options of raising capital. Well capitalized NBFC Highest CAR amongst its peers % of Top 10 shareholders 17 Source: Company, Ace Equity,

18 IDFC s Total Income is on the rise Profitability continues to remain healthy IDFC had reported a strong growth in its Total Income and its profitability over the past few years. The company s Total Income has grown at a CAGR of ~17 to INR3473 crores over the period of FY Whereas, Operating Profit and Profit After Tax (PAT) have grown at a CAGR of ~21% and ~20% respectively over the same period. The company s customised business model coupled with stable asset quality and deep understanding and strong relation with the corporate acted as positive factors. We anticipate ~12% and ~14% CAGR growth in its total income and PAT respectively over the period of FY Operating Profit to grow at a CAGR of ~12% over FY13-16 Profitability to grow at a CAGR of ~14% over FY Source: Company,

19 Growing profitability boosted Return ratios In the present challenging environment, wherein, macro and micro economic environment led to higher stress, IDFC has managed well and kept return ratios healthy. In December 2013, its Return on Assets (ROA) and Return on Equity (ROE) stood at 2.9% and 14.4% respectively. The company s diversified loan portfolio which has helped it to improve its profitability and also, its active management of current and future business needs considering the risks in its businesses were the core reason of this achievement. We anticipate company s ROE and ROA of 14.58% and 3.03% for FY15E and 15.03% and 2.98% for FY16E respectively. However, there may be a pressure on company s ROE and ROA after starting of its banking business, which is expected to start just after months time frame from now. Healthy Return Ratios Business size to grow at a CAGR of ~12% over FY Source: Company, ACE Equity.

20 Cost/Income ratio Operationally efficient Infrastructure Finance Company IDFC has well managed its cost which is clearly reflected in its Cost/Income ratio. In FY13, the company has reported 278bps improvement in its operating Cost/Income ratio to 15.29%. We believe the company s foray into the new banking business which is expected to start just after months may push up its cost. We anticipate 15.93% and 15.86% of its Cost/Income ratio for FY15E and FY16E respectively. Beside this, the company s behemoth business structure, diversified business portfolio coupled with selective approach for loan finance and skillful employees have boosted its employees productivity and profitability. The following graphs depicts the productivity and profitability per employee of the company. Employee Cost/Operating Expenses is likely to stable Business/employee (INR Crs.) is on the rise Profitability/employee (INR lakhs) is on the rise Net Profit per employee is on the rise (INR Crs.) Assets/employee is on the rise (INR Crs.) 20 Source: Company, Ace Equity,

21 Peers Analysis We believe, post the commencement of banking business, IDFC s credit profile may be benefited in the long term, as the company will have the options for the transition of its loan book over the various segments. Moreover, going forward revival in the economy (as expected) will also help the company s financials. Note:- All figures are as on 31 st March 2013, Valuations and Return Summary prices are as on. 21 Source: Companies, Ace Equity,

22 Valuation and Recommendation Notwithstanding challenging environment wherein, macro and micro economic environment led to higher stress, IDFC has managed to keep return ratios healthy. The company s 3 year average (FY11-13) ROE and ROA were 13.30% and 2.9% respectively. However, in December 2013, its Return on Assets (ROA) and Return on Equity (ROE) improved to 2.9% and 14.4% respectively. The company s diversified loan portfolio and its active management of current and future business needs has helped it to maintain healthy returns. At the CMP of INR116.55, the stock is trading at TTM P/BV of 1.29x. The current valuations of 1.03x FY15E and 0.92x FY16E Book Value looks attractive. We recommend a BUY on the stock with a target price of INR148 (1.16x FY16E BV) with an upside potential of ~27% from the current level with an investment horizon of months. Valuation is inexpensive and looks attractive P/BV Band 22 Source: Company, ACE Equity,

23 Financials & Projections 23 Source: Company, Ace Equity,

24 Financials & Projections 24 Source: Company, Ace Equity,

25 Key Concerns The Banks and other financial institutions are also present in the infrastructure sector. The company may face huge competition which may force it to reduce its lending rate, if Banks start increase their foothold in this segment. Further delay in the execution of stalled projects and slowdown in the economy may act as a vicious cycle on investment in Capex, which may affect the company s financials and also, increase risk on its asset quality. Company s investment banking and other capital market related business may be affected, if there may slowdown in the capital markets going forward. 25

26 : Phone No.: Ajay Jaiswal: President, Investment Strategies, Head of Research: Fundamental Research Name Sectors Designation ID Nitin Prakash Daga IT, Telecom & Entertainment VP-Research Sutapa Roy Economy Research Analyst Sanjeev Jain BFSI Research Analyst Neha Majithia Metal, Mineral & Mining Research Analyst Soumyadip Raha Oil & Gas Executive Research Saroj Singh Auto, cement Executive Research Pooja Saraf FMCG, Textiles,Cons. Goods Research Analyst Anandarup Goswami Midcaps Research Executive Khusboo Jaiswal Midcaps Research Executive Ajoy Mukherjee Pharmaceuticals, Agrochemicals Research Analyst Technical & Derivative Research Vinit Pagaria Derivatives & Technical Senior VP Ranajit Kumar Saha Technical Research Sr. Manager Institutional Desk Abhishek Sharma Institutional Desk Dealer PMS Division Siddharth Sedani PMS Research VP Research-Support Subhabrata Boral Research Support Asst. Manager Technology Recommendati on Expected absolute returns (%) over 12 months Strong Buy >20% Buy between 10% and 20% Hold between 0% and 10% Underperform between 0% and -10% Sell < -10% MICROSEC RESEARCH IS ALSO ACCESSIBLE ON BLOOMBERG AT <MCLI> 26

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