The ratings reflect Infrastructure Development Finance Company Ltds (IDFC) strong financial profile, which is underpinned by its high capitalisation levels, comfortable liquidity position and strong resources profile.
Crisil expects the company to maintain this conservative financial profile as its loan disbursements are expected to grow at a cautious rate in future in line with its business strategy. While IDFCs core business of financing infrastructure projects poses inherent risks, Crisil expects its high capitalisation levels and strong risk management systems to significantly mitigate the same. IDFCs earnings profile is good but declining yields could pressurise its profitability in future.
Crisil considers the support that IDFC receives from the Government of India (GoI) to be a positive rating factor given the institutions central role in enabling infrastructure financing in the Indian private sector and the governments thrust on infrastructure development in recent years.
Rating Sensitivity Factors
The mitigation of asset-related risks in the infrastructure financing segment, which has unique project specific risks;
Diversification of its exposure to different segments of the infrastructure sector; and
The GoIs ownership and continued support
Crisil expects that IDFCs financial profile would continue to be strong with high capitalisation levels. In Crisils opinion, IDFC would continue to benefit from support from the Government of India (GoI), given IDFCs central role in enabling infrastructure financing in the Indian private sector. The maintenance of asset quality levels, given the elements of risks present in the area of infrastructure financing, would be one of the key determinants of IDFCs credit risk profile.
Continued strong capitalisation levels: A high Tier I capital ratio of 35.93 per cent as at March 31, 2003 ensures that IDFC has a strong capital cushion against asset-related risks. The institution also has Rs 6.5 billion of 50-year-tenure subordinate debt from GoI and the Reserve Bank of India (RBI). This forms part of its Tier II capital, which, along with the Tier I capital, enables IDFC to have an overall capital adequacy ratio of 51.95 per cent as at March 31, 2003. In Crisils opinion, IDFC would continue to maintain high levels of capital adequacy, going forward.
Although IDFCs asset profile is characterised by exposure only to the infrastructure sector with its accompanying project implementation risks and a largely unseasoned portfolio, Crisil believes that the present capitalisation levels would be adequate to offset any potential asset-related costs that may arise in the medium term.
Comfortable liquidity position: IDFCs comfortable liquidity position is evident from its large portfolio of liquid investments and its currently positive asset-liability maturity profile (ALM) on account of its significantly net worth-funded operations. Liquid investments represented 18 per cent of its balance sheet as at March 31, 2003 and around 78 per cent of the total investments portfolio as at March 31 2003. This position was also reflected in the investments portfolio as at September 30, 2003.
Moreover, IDFC has a stated policy of maintaining adequate liquidity at all times. Due to the high level of net-worth funding for operations and the long tenure of subordinate debt from GoI and the RBI, IDFC has a positive ALM profile in the near term, at present on its balance sheet, which mitigates the incidence of liquidity risk. However, with the increase in the level disbursements in the future, funded out of debt, the comfort on the ALM front could decline. IDFC has a natural hedge against interest rate risks as its infrastructure loans are extended on a fixed rate basis, using the available net worth and fixed rate borrowings on the liabilities side.
Strong resources profile: IDFC has a strong ability to raise resources from a diverse mix of wholesale funding sources at benchmark rates. Moreover, the subordinated debt from GoI and RBI is benchmarked to gilt rates. Crisil believes that the re-pricing of some of its liabilities will drive down its overall resources cost in FY2003-04.
Lending to the infrastructure sector exposes IDFC to unique project specific risks: IDFCs core business comprises lending to infrastructure projects, which have unique risks depending on the specific infrastructure sector. Therefore, Crisil feels that the mitigation of such risks in order to maintain asset quality is a key imperative for IDFC. Crisil believes that the institutions strong risk management and monitoring systems help it to address these risks to a large extent. This is further supported by the appropriate structuring of its transactions, which partly mitigates the inherent portfolio risks.
IDFCs loan portfolio comprises primarily of lending to the energy, telecommunications and transportation sectors. Together, these three sectors accounted for over 99 per cent of its total loan assets as at March 31, 2003 and as at September 30, 2003. IDFC has a high level of concentration to two corporate groups, which comprised around 23 per cent of its total loan assets as at September 30, 2003. This high level of exposure gives rise to concentration risks in IDFCs loan portfolio. However, over time IDFC has been increasing the diversity of its exposures by broad-basing its presence within sub-sectors of the above industry segments, in order to mitigate this risk.
IDFC now plans to expand into other infrastructure areas such as urban infrastructure, logistics, healthcare and education but any significant benefit of such sectoral diversification is not expected in the near term. Although at around 0.8 per cent as at September 30, 2003, the institutions gross non-performing assets (NPAs) are at acceptable levels, its loans portfolio is still largely unseasoned, mainly due to the relatively high gestation period of infrastructure projects.
Good but declining profitability level: IDFCs profitability declined in FY2002-03 on account of a decline in yields in both its investments as well as its loan portfolios. The companys net profitability margin (measured as net interest yields less expenses plus fee income on an average funds deployed basis) dipped to 1.5 per cent in FY2002-03 from 3.6 per cent in FY2001-02 despite a reduction in interest costs and expense levels (as a percentage of average funds deployed) because the rate of reduction in yields was faster than that in resource costs and expense levels. This is also reflected in the reduction in its overall profitability levels (as measured by profit after tax / average assets) to 4.92 per cent in 2002-03 from 5.94 per cent in the previous year. The institutions core fee income as a percentage of funds deployed too declined marginally in FY2002-03 over the previous year.
In view of the soft interest rate regime, Crisil feels that IDFC will continue to witness a downward pressure on its yields, which will be partly offset by a repricing of its liabilities in FY2003-04. Moreover, in future, as its loan portfolio gets seasoned, IDFCs overall profitability, will to a large extent, depend on its ability to manage asset quality and contain provisioning costs.
Significant government ownership and IDFCs public policy role provides comfort to the rating: The GoIs significant though not majority ownership in IDFC, the consequent support extended by it to the latter as well as the importance that it has accorded to developing the countrys infrastructure sector are all reflected in IDFCs rating. The GoI and RBI have not only subscribed to the institutions subordinate debt of Rs 6.5 billion but also extended its tenure from 15 years to 50 years and benchmarked the cost of the debt to gilt rates. IDFC also works closely with the Prime Ministers Office (PMO) on important policy advisory assignments for the infrastructure sector and is a key entity for leading private sector participation in this sector.
The development of the infrastructure sector has been one of the main thrust areas of the central government as it forms the backbone of the Indian economy.
Given the huge resources required to develop infrastructure in the country, the GoI has laid greater emphasis on attracting private sector investment in the sector. IDFC was, in fact, specifically created for this purpose.
Going forward, the flow of private capital to the infrastructure sector would critically depend on the successful implementation of the policy-level initiatives taken by the GoI to make the sector viable for such investments. These initiatives would, in turn, determine IDFCs business growth in future.