IDFC declared its Q3FY09 results, which were below our expectations. The PAT declined 15% YoY to Rs 184 crore against our anticipated growth of 8% YoY. On the core business front, approvals and disbursements declined substantially, but NII jumped 32% on a YTD basis with NIMs at 2.9%. The disappointment in PAT can be attributed to the dwindling other income, which decreased by 6% YTD to Rs 154 crore. Within the non interest income, income from the principal investment segment declined to Rs 1 crore in Q3FY09 from Rs 74 crore in Q3FY08. Also, the lacklustre capital markets resulted in a dismal performance of the investment banking and broking verticals.
Highlight of the quarter The conservative approach of the management was reflected in the approvals and disbursements, which have declined substantially (loan book growth was just 7% to Rs 21304 crore on a YTD basis). The non-interest income, as a result of leverage to capital markets, has declined sharply 61% YoY and 65% QoQ to Rs 76 crore. The NPA quality still remains healthy. Though NIMs expanded to boost NII in the quarter, we expect them to sustain at 2.5% to 2.7%.
Valuations We believe the economic slowdown would lead to a tapering down in growth of IDFC’s loan book from a level of 30-40% (generated over the past few years) to a level of 10-15% in the next two quarter, which would put pressure on the RoA (current 2.5% on rolling basis) in the medium term. We expect the overall PAT to grow at 10% CAGR over FY08-10E. With leverage at 4.8 x and a comfortable capital adequacy — Tier I at 19% — IDFC would be able to grow its balance sheet by 15-20%. Consistent fee based income from $2.5-billion AUM should give further cushion to profits. At the CMP of Rs 58, IDFC is trading at 0.9x its FY10E ABV. As the management is conscious due to an uncertain environment, we value IDFC’s core business at 1.2x ABV. On an SOTP basis, we have arrived at a fair value of Rs 80 over a period of 12-15 months.
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