India Equity Institutional Research | Banking Result Update

IDFC Ltd ` 207

Strong operating performance BUY

Price Outlook ` 254
IDFC reported strong operating numbers with consolidated PAT of Rs 339 crs growing 16%
y-o-y and flat q-o-q. Approvals and disbursement were up 2.3x and 2.5x y-o-y Market Data Nov 10, 2010
respectively, reflecting buoyant business outlook for infrastructure financing. Net Shares outs (Cr) 146
interest income up 35% y-o-y and 11% q-o-q; driven by strong loan growth at 56% y-o-y Equity Cap (`. Cr) 1460
and stable net interest margin. General provision increased 104% y-o-y on account of Mkt Cap (`. Cr) 31362
higher disbursements. Investment banking showed impressive performance on q-o-q due 52 Wk H/L (`) 218/141
to higher fund mobilization and better yield on deals executed. Asset management Avg Vol (1yr avg) 982947
business remained under pressure in term of volume growth and yield. We believe IDFC is Face Value (`) 10
well placed to capture sizable infrastructure financing opportunity both on fund and non Bloomberg Code IDFC IN
fund side through various business vertices.
Market Info:
Operating income up 24% y-o-y and 5% q-o-q: Strong NII growth 35% y-o-y and relative
SENSEX 20932
stable non interest incomes led to healthy operating income at 24% y-o-y. Non-interest
NIFTY 6302
income primarily driven by lending operation based fee income and investment banking fee.
Capital gains under principal investments saw 81% decline y-o-y due to limited profit booking
Price Performance
on listed investments and minimal exit from private equity investments.
140

Lending spread declined 30 bps on q-o-q- Core lending spread declined 30 bps from 2.7% in 130

Q1FY11 to 2.4% in Q2FY11 due to rise in cost of funds and lower yield on large project 120

funding. However, IDFC is planning to raise $ 0.50 bn per year from overseas markets to 110

stable cost of funds and diversify liability franchise. With diversification of liability franchise 100

and targeting better yield on asset side, we expect IDFC to sustain core lending spread at 2.3- 90

2.4% going forward. 80

70
Operating leverage playing out– Operating income increased 24% y-o-y against 12% rise in 60
operating expenses resulting into 30% y-o-y growth in pre provisioning profits. Provisioning

Aug-10
Apr-10
Jan-10

Jun-10

Sep-10
Feb-10

Mar-10
Nov-09

Dec-09

Nov-10
Jul-10
May-10

Oct-10
expenses up 104% y-o-y due to higher general provision on account of robust disbursements.
Well capitalized for Infrastructure financing play- IDFC is well capitalized as its capital IDFC Sensex

adequacy ratio stood at 24.7% enabling it to grow its business by over 30% for the next three
Share Holding pattern (%)
years. After recent capital raising, financial leverage at 4.2x which will increase to 7x in
Particulars Sep-10 Jun-10 Chg
medium on sustainable basis.
Promoters 00.0 00.0 0.0
Valuation & Recommendation FIIs 51.3 44.4 6.9
Currently IDFC is trading at 19.3x of FY12E earnings and 2.5x FY12E BVPS. We believe Strong Institutions 36.3 43.1 -6.8
growth outlook, solid one firm business model, operating efficiency, incremental
Others 12.4 12.5 -0.1
improvement in asset management, investment banking and broking businesses will be key
investment rationale. IDFC performed strongly well on growth, operating efficiency and Total 100.0 100.0
capital linked businesses fronts during the quarter. We reiterate our ‘Buy’ rating on the stock
Source: BSE
with a price target of ` 254 on SOTP basis implying upside 22%.
Manish Ostwal
Key Financials Rs crore manish.ostwal@krchoksey.com
℡ 91-22-6696 5555
FY09 FY10 FY11E FY12E
Net Interest Income 765 938 1,355 1,691 Palak Shah
palak.shah@krchoksey.com
Operating Profit 1,189 1,558 1,941 2,319 ℡ 91-22-6696 5502
Net Profit 758 1,062 1,379 1,622
EPS 5.9 8.2 9.2 10.8
BVPS 47.7 53.9 76.5 84.4
P/E 9.1 25.4 22.7 19.3
P/BV 1.1 3.8 2.7 2.5
Source: Company, KRChoksey Research

www.krchoksey.com
℡ 91-22-6696 5203
¬ 91-22-6691 9569

KRC Research is also available on Bloomberg KRCS<GO>, Thomson Reuters, Factset and Capital IQ
IDFC

Robust NII driven by strong loan growth

Net interest income up 35% y-o-y driven by strong loan book growth at 56% y-o-y and marginal declined in net interest margin
sequentially. Treasury NII declined by 40% y-o-y due to lower yield and shifting of surplus funds from treasury book to loan book. Core
lending spread on 12 months rolling basis declined 30 bps sequentially to 2.4% on account of rising cost of funds.

Exhibit :1 Loan and NII growth Trend y-o-y Exhibit : 2 NII / Avg asset Rolling Basis – Calculated

150% 4.0%
120%
3.8%
90%
60% 3.6%
30%
0% 3.4%

‐30%
3.2%
Dec‐09
Jun‐09

Jun‐10
Sep‐09

Sep‐10
Mar‐10

3.0%

Sep‐09

Sep‐10
Dec‐09
Jun‐09

Jun‐10
Mar‐10
Loan growth  NII growth 

Source: Company, KRChoksey Research

Strong operating income

Net interest income and non interest income contributed 56% and 44% respectively to operating income during the quarter. Net interest
income grew by 35% y-o-y whereas non-interest income increased modestly at 11% y-o-y resulting income operating y-o-y growth at
24%. Capital gains under principal investment activities saw significant decline due to limited profit booking in equity investments and
private equity investments. IDFC has been ranked fifth largest infrastructure fund mobilization in Asia by Thomson Reuters. Investment
banking shown improved operating performance at 168% q-o-q growth. Institutional broking fee increased 7% q-o-q trending upturn
going forward. Loan related fee income grew strongly at 143% q-o-q driven by higher disbursement and syndication fee on project
finance and advisory.

Exhibit :3 Opertaing income trend

Rs in crore Q2FY11 Q2FY10 Q1FY11 y-o-y q-o-q
Net interest income 374 277 337 35% 11%
Infrastructure 359 252 304 42% 18%
Treasury 15 25 33 -40% -55%
Non interest income 273 246 275 11% -1%
Principal Investment 12 61 120 -80% -90%
Infrastructure 4 53 119 -92% -97%
Financial 8 8 1 0% 700%
Asset management 75 69 65 9% 16%
Management fees 55 69 65 -20% -15%
Mutual Fund 18 31 27 -44% -36%
Alternatives 38 37 37 1% 1%
Capital gains & Carry 20 0 0 - -
Investment Banking & Broking 74 60 36 24% 106%
Investment Banking 59 47 22 24% 168%
Institutional Broking 15 12 14 21% 7%
Loan related & other fees 107 38 44 182% 143%
Misc income 5 18 10 -72% -50%
Opertaing income 647 523 612 24% 6%

2 KRChoksey - Institutional Research

IDFC

Matched and diversified liability Franchise

Borrowings up 40% y-o-y; mobilized from various instruments and geographies during the quarter. Borrowings include long term debt
85% and short term debt at 15% reflecting well managed asset liability management. Asset duration and liability duration stood at 2.11
yrs and 2.36 yrs respectively.

Exhibit :5 Asset Liability Trend Exhibit :6 Diversified Liability Franchise

Asset duration Liability duration 

2.5

2.0

1.5

1.0

0.5
Bonds / Debentures Rupee Loans
0.0 Forex Loans Sub Debt
Jun‐09 Sep‐09 Dec‐09 Mar‐10 Jun‐10 Sep‐10
Short term Loans

Source: Company, KRChoksey Research

Power, Transportation and Telecom remained loan book growth drivers

Loan book grew 56% y-o-y and 19% q-o-q during the quarter; gross approvals and disbursement were up 2.3 and 2.5x respectively.
Power, transportation, telecom contributed 87% of outstanding disbursement, reflecting strong growth momentum going forward.
Power, transportation and transportation saw strong growth in terms quarterly disbursements. In terms of product distribution,
corporate loans and project contribute 88% of outstanding disbursements.

Exhibit :7 Product based O/S disbursement Break up – Q2FY11 Exhibit :8 O/S Disbursement Mix – Q2FY11

Project Loans Corporate Loans
Loan against  Shares  Mezzanine Products Energy Transport  Telecom Others 
Equity / Pref Shares Non‐Funded

Source: Company, KRChoksey Research

3 KRChoksey - Institutional Research

IDFC

Diversified asset under management and stable management fee

Asset under management stood at Rs29,776 crore at end of Q2FY11, comprising mutual fund assets, alternative assets, project equity.
Fee income asset management up 9% y-o-y and 15% q-o-q, shaping stable revenue stream for IDFC. Mutual funds business remained
under pressure due to new regulatory environment and poor response for incremental fund raising.

Exhibit :7 AUM and Asset Management Fee income Trend Exhibit :8 Asset under management composition – Q2FY11

` Crores

40000 85
Assets Under Management
80 ` Crore USD Bn
35000 75 IDFC Private Equity 5992 1.3
Rs in crs

Rs in crs
70 Fund I 844 0.2
30000
65 Fund II 1988 0.4

60 Fund III 3160 0.7

25000
IDFC Project Equity Fund 3837 0.9
55
IDFC Mutual Fund 19948 4.4
20000 50
Investment Advisor 876 0.2
Dec‐09
Sep‐09

Sep‐10
Jun‐09

Jun‐10
Mar‐10

Equity 5352 1.2

Debt 13720 3.1
Total 29777 6.6
AUMs Asset management  fee 

Source: Company, KRChoksey Research

Operating leveraged played out

Operating income increased 24% y-o-y against 12% rise in operating expenses resulting into 30% y-o-y growth in pre provisioning profits.
Provisioning expenses up 104% y-o-y due to higher general provision on account robust disbursements. Reported cost to income ratio
declined 80 bps from 25.3% in Q1FY11 to 24.5% in Q2FY11. We believe wholesale business model and better utilization of operating
capital market businesses offer immense scope further operating leverage going forward.

Exhibit :8 Cost to income ratio

50.0%

45.0%

40.0%

35.0%

30.0%

25.0%

20.0%

15.0%
Jun‐09 Sep‐09 Dec‐09 Mar‐10 Jun‐10 Sep‐10

Source: Company, KRChoksey Research

4 KRChoksey - Institutional Research

IDFC

Quarterly Result Analysis

Income Statement
Q2FY11 Q2FY10 Q1FY11 y-o-y q-o-q
NII grew 35% q-o-q driven by
volume growth. Net Interest Income 374 277 337 35% 11%
Infrastructure 359 252 304 42% 18%
Non- interest income grew 11% q-o-
q, Loan related fee income growth Treasury 15 25 33 -40% -55%
at 143% q-o-q. Non Interest Income 272 245 276 11% -1%
Operating Income 646 522 613 24% 5%
Operating Expenses 122 109 123 12% -1%
Provisions increased by 104% on Pre-Provisioning Profits 524 413 490 27% 7%
account of general provisioning on
higher disbursement Provisions & Losses 49 24 45 104% 9%
PBT 475 389 445 22% 7%
PAT grew by 16% y-o-y driven by Tax 136 97 110 40% 24%
core operating performance.
PAT 339 292 335 16% 1%

Balance Sheet
Q2FY11 Q2FY10 Q1FY11 y-o-y q-o-q

Net Worth 10276 6743 7322 52% 40%

CCPS 840 0 0 - -
Loan Funds 35300 25238 31283 40% 13%
Advances grew by 56% y-o-y while
Minority Interest 7 1 7
borrowings grew by 40% q-o-q
Total Liabilities 46423 31982 38612 45% 20%
Infrastructure Loans (net) 34397 22045 28901 56% 19%
Investments 10287 8318 7800 24% 32%
Goodwill 1160 1160 1160 - -
Fixed assets & Other assets 579 459 751 26% -23%
Total Assets 46423 31982 38612 45% 20%

Operating Performance – Reported

Q2FY11 Q2FY10 Q1FY11 y-o-y q-o-q
Gross approvals and disbursements
up 2.3x and 2.5x respectively Gross Approvals 32765 9903 13046 231% 151%
Gross Disbursements 17369 4907 6204 254% 180%
Net interest income / Avg assets 3.7% 3.4% 3.6% 30 bps 10 bps
Infrastructure 3.4% 2.9% 3.3% 50 bps 10 bps
Treasury 0.3% 0.5% 0.3% -20 bps 0 bps
RoA 3.3% 2.9% 3.4% 40 bps -10 bps
Lending spread declined 10 bps
sequentially Spread on lending 2.4% 2.6% 2.7% -20 bps -30 bps
Cost to income ratio 24.5% 23.5% 25.3% 100 bps -80 bps
Effective tax rate 26.2% 27.5% 25.1% -130 bps 110 bps
Loan loss reserve 1.6% 1.8% 1.7% -20 bps -10 bps
Leverage at 4.2x vs target Leverage (x) 4.2 x 4.7 x 5.3 x
sustainable leverage of 7x
RoE 14.9% 13.7% 16.2% 120 bps -130 bps
Source: Company, KRChoksey Research

5 KRChoksey - Institutional Research

IDFC

Financials

Income Statement
FY09 FY10 FY11E FY12E
Interest income 2,846 2,892 3,513 4,497
Interest expense 2,081 1,953 2,158 2,806
Net interest income 765 938 1,355 1,691
Non interest income 791 1,169 1,243 1,443
Operating income 1,556 2,107 2,599 3,135
Operating expenses 367 548 657 816
Pre-provisioning profit 1,189 1,558 1,941 2,319
Provision 153 130 77 96
Profit before tax 1,036 1,429 1,864 2,223
Tax expense 278 367 485 601
Net profit 758 1,062 1,379 1,622
PAT after MI 768 1,063 1,379 1,622
Proposed dividend 182 228 359 438
Source: Company, KRChoksey Research

Balance Sheet
FY09 FY10 FY11E FY12E
Net worth 6176 7010 11525 12708
MI 28 6 6 6
Borrowings 23,605 26,544 29,502 38,935
Total Liabilities 29,809 33,561 41,032 51,649
Infra Loans 20,596 25,031 31,289 40,050
Investments 6,500 4,642 5,392 6,142
Goodwill 1,079 1,169 1,169 1,169
Fixed assets & other assets 1,633 2,718 3,183 4,289
Total Assets 29,809 33,561 41,032 51,649
Source: Company, KRChoksey Research

Key Ratios
Key Ratios FY09 FY10 FY11E FY12E
Net interest margin 2.6% 2.9% 2.8% 2.9%
RoA 2.5% 3.0% 2.8% 2.8%
RoE 12.9% 15.1% 11.0% 12.2%
Cost to income ratio 24% 26% 25% 26%
CAR 22% 22% 23% 21%
Tier I 20% 27% 22% 20%
Source: Company, KRChoksey Research

Valuation
Valuation FY09 FY10 FY11E FY12E
EPS (Rs.) 5.9 8.2 9.2 10.8
DPS (RS.) 1.4 1.7 2.4 2.9
BVPS (Rs.) 47.7 53.9 76.5 84.4
Adj. BVPS (Rs.) 47.7 53.9 76.5 84.4
PE (x) 9.1 25.4 22.7 19.3
Price to book (x) 1.1 3.8 2.7 2.5
Source: Company, KRChoksey Research

6 KRChoksey - Institutional Research

IDFC

SOTP Valuation
Based on FY12 Estimates Basis of Valuation
Core Lending Business 211 2.5x of Book value based RI Model
Investment banking & brokerage 13 15x of Earnings
Private Equity 18 15% of AUM
Mutual fund 12 5% of AUM
Intrinsic value per share (Rs.) 254
Current market price (Rs.) 207
Implied upside (%) 22%
Source: Company, KRChoksey Research

7 KRChoksey - Institutional Research

IDFC

Rajiv Choksey Co-Head Institutional Equities rajiv.choksey@krchoksey.com +91-22-6696 5555

Anuj Choksey Co-Head Institutional Equities anuj.choksey@krchoksey.com +91-22-6696 5500

Naveen Fernandes Head-Institutional Broking naveen.fernandes@krchoksey.com +91-22-6696 5554

Kunal Dalal Head of Research kunal.dalal@krchoksey.com +91-22-6696 5574

IDFC Rating Legend

BUY
240 Our Rating Upside
220
BUY
200 Strong Buy More than 25%
BUY
180

160 Buy 15% - 25%

140
Hold 10% - 15%
120

100
Reduce Nil – 10%
Mar-10

Aug-10
Nov-09

Nov-10
Jan-10

Apr-10

Jun-10

Oct-10
May-10

Jul-10

Sep-10
Feb-10
Dec-09

Sell Less than 0%

Disclaimer:
This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a
security. While the information contained therein has been obtained from sources believed to be reliable, investors are advised to
satisfy themselves before making any investments. Kisan Ratilal Choksey Shares & Sec Pvt Ltd., does not bear any responsibility for the
authentication of the information contained in the reports and consequently, is not liable for any decisions taken based on the same.
Further, KRC Research Reports only provide information updates and analysis. All opinion for buying and selling are available to
investors when they are registered clients of KRC Investment Advisory Services. As per SEBI requirements it is stated that, Kisan Ratilal
Choksey Shares & Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or
sale thereof while this report is in circulation.

Please send your feedback to research.insti@krchoksey.com

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Registered Office:
1102, Stock Exchange Tower, Dalal Street, Fort, Mumbai – 400 001.
Phone: 91-22-6633 5000; Fax: 91-22-6633 8060.

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Phone: 91-22-6696 5555; Fax: 91-22-6691 9576.

8 KRChoksey - Institutional Research