Declining funding costs should help to improve spreads in H2FY13. IDFC has managed asset quality well, even as it has built a healthy provisioning buffer. The stock was down 13% over the past month compared with the 4% fall in the Sensex, and is trading at an attractive valuation of 1.3x P/B and 9.3x P/E on FY13E, with a FY12-14E earnings CAGR of 21% and average RoE of 15%. We upgrade the stock to buy with a target price of R140, offering 22% upside.
March quarter witnessed strong lending business and weak non-interest income. Net profit, at R336 crore (+16.3% y-o-y and -12% q-o-q), was 19% below our estimate due to weak non-interest income. NII was at R586 crore (+22.6% y-o-y and +7.3% q-o-q). Non-interest income at R140 crore (-26.3% y-o-y and -34.9% q-o-q) was 42% below our estimate. Disbursements were up 42% y-o-y and 2% q-o-q, while approvals were up 64% y-o-y and 31% q-o-q. Calculated NIM was down 5 bps q-o-q. Loans outstanding were strong, at 28% y-o-y. Gross NPLs on a standalone basis were flat q-o-q.
Lending business momentum strong; asset quality and CAR comfortable. For H2FY12, approvals were up 84% y-o-y and 29% h-o-h (2H vs. 1H), while disbursements were up 27% y-o-y and 79% h-o-h. Cumulative outstanding approvals are at R6,972 crore or 1.5x outstanding loans, which should ensure healthy loan momentum. With a likely decline in funding costs in 2HFY13, spreads for IDFC should expand. Asset quality is being kept in check, and loan loss reserve at 1.5x provides adequate cushion for any asset quality surprises. The gain from principal investments also provides earnings cushion. We value IDFC on a sum-of-the-parts basis, on a two-stage residual income model. Assumptions for the model include an income CAGR of 11%, dividend payout of 25%, cost of equity of 14.7%, and terminal growth rate of 5% (nominal growth rate for developed countries).