CAPITA TELE WEDNESDAY RECOMMENDATION DT:1.8.07

WEDNESDAY CAPITA TELEFOLIO RECOMMENDATION



Infrastructure Development and Finance Corporation

Proxy on Indian infrastructure opportunity

Splurge in infrastructure investments in India will throw up number of fund-based and especially non-fund-based opportunities and the company is well-placed to capitalise on the same

Buy
Infrastructure Development and Finance Corporation

BSE Code
532659

NSE Code
IDFC

Bloomberg
IDFC@IN

Reuter
IDFC.BO

52-week High/Low
Rs 138 / Rs 53

Current Price
Rs 127 (as on 1st August 2007)


Infrastructure Development and Finance Corporation (IDFC) was established in 1997 as a private sector enterprise by a consortium of public and private investors and is a leading NBFC specialized in infrastructure finance in India. The company has a well-managed team of professionals with international and national experience from diverse professional backgrounds at the helm of affairs.

A specialised intermediary in infrastructure financing

IDFC is positioned as a specialised intermediary in infrastructure financing, not only providing project finance but also arranging and facilitating the flow of private capital to infrastructure development by creating appropriate structures and financing vehicles for a wide range of market participants. The financial institution offers fund-based products including senior debt financing in the form of loans, debentures and securitised debt. It undertakes subordinated debt, preference capital and equity financing through proprietary investments in unlisted equity as well as public offers of infrastructure companies. It also offers non-fund-based products such as guarantees, debt syndication & advisory services on project and financial structuring.

The Company's goal is to become the most profitable, most innovative, most influential and largest multi-product financier for the development of infrastructure in the country.

The company’s main focus is Transport, Energy, Telecommunication and IT, and Industrial and Commercial infrastructure.

Strong relationships

Thus, IDFC's strategy has been tuned to driving both the size of the asset book as well as returns on investments. The Company strives to use its extensive domain knowledge to become a 'one-stop-shop' for infrastructure financing. In the process, IDFC has built strong relationships with the sponsors of infrastructure projects by working closely with clients - right from the pre-bidding stage to project commissioning. It's expertise and innovative ability enables the Company to continuously expand its range of products, and to participate in the more profitable parts of the capital structure of any infrastructure project like debt syndication, structured financing and equity participation.

The company’s established relationship with the central government (which holds around 20% equity stake) gives it access to decision makers, which will help in playing a significant role in the direction of infrastructure policy in the country and keep a few steps ahead of competition (mainly from banks). In fact banks are tieing up with IDFC to identify, assess and finance infrastructure projects.

Asset Management business has tremendous growth potential

IDFC is actively engaged in mobilising and managing third party funds for long-term equity investments in infrastructure. Though IDFC Private Equity Company Limited ('IDFC Private Equity'), a wholly owned subsidiary of IDFC, aims to secure attractive returns by providing equity-based risk capital to early stage and rapidly growing infrastructure focused companies. It is the investment manager of two funds - the India Development Fund (IDF-I) and the India Development Fund- II (IDF-II), with a combined asset under management (AUM) of US$ 650 million. US$ 200 million that was raised under IDF-I in 2002-03 has been fully committed; while 30 per cent of US$ 450 million raised under IDF-II in FY 2005-06 had been committed as of March 31, 2007. Between the two, they form the largest corpus among the dedicated private equity funds focused on Indian infrastructure. Going forward, IDFC Private Equity will be looking to raise a third fund in FY 2007-08.

In addition, IDFC Project Equity Company Limited ('IDFC Project Equity') was set up in 2006-07 to manage the proposed USD 2 billion third party equity component of the 'India Infrastructure Initiative'. This fund would be a very significant step forward to IDFC's asset management business. It would allow IDFC to invest equity capital at the level of individual infrastructure assets such as individual road projects, power plants and port concessions, in addition to investing in companies that develop infrastructure through its various private equity funds. Going forward, the Company is also keen to leverage its extensive knowledge base to advise offshore and domestic funds on investments in public limited companies in the Indian infrastructure space. The Company is also exploring opportunities made available in the Union Budget 2007-08, which permits mutual funds to launch and operate dedicated infrastructure funds.

The company’s tie-up with Citigroup, Blackstone and India Infrastructure Finance Company (IIFCL) for deploying US$5 bn into infrastructure projects in India has significantly improved the visibility for fee income streams. Out of total expected funds of US$5 bn, the equity component of US$2 bn will be managed by IDFC and the debt component of US$3 bn (to be raised by IIFCL) is being appraised by IDFC.

After good FY 2007, consolidated business sees strong growth in first quarter

For the quarter ended June 2007, IDFC’s consolidated income from operations surged by 80% to Rs 609.63 crore. However interest expense surged by 89% to Rs 311.15 crore. Further its other expense rose by 271% to Rs 48.58 crore. Thus the operating profit growth was constrained to 55% amounting to Rs 249.97 crore. The provisions & contingencies surged from Rs (–0.25) crore in quarter ended Jun ’06 to Rs 6.32 crore in quarter ended Jun ’07. The depreciation cost rose by 18% to Rs 1.18 crore. Thus the PBT stood at Rs 242.27 crore, up by 51%. Further the tax provisions rose by 95% to Rs 58.19 crore. Thus the Net Profit (before profit of Associates and adjustment for Minority Interest) rose by 40% to Rs 184.28 crore. On accounting Share of profit of Associates that rose by 350% to Rs 0.18 crore and minority interest that surged from Rs 0.10 crore quarter ended Jun ’06 to Rs 3.48 crore quarter ended Jun ’07, the PAT after minority interest stood at Rs 180.98 crore, up by 38%.

The consolidated financial results are of Infrastructure Development Finance Company Limited and its subsidiaries - Feedback First Urban Infrastructure Development Company Limited, IDFC Investment Advisors Limited, IDFC Private Equity Company Limited, IDFC Project Equity Company Limited, IDFC Trustee Company Limited & S. S. Kantilal Ishwarlal Securities Private Limited and its proportionate share in joint ventures and other investee companies, where applicable.

Its gross approvals grew by 57% to Rs 4157 crore for 40 projects. Its gross disbursements grew by 83% to Rs 2444 crore for 54 projects.

For FY 07, on consolidated basis, its total income increased by 52% to Rs 1571.29 crore. Interest expenses increased by 71% to Rs 855.46 crore and operating profits increased by 32% to Rs 638.11 crore. Finally net profits increased by 29% to Rs 503.92 crore.

Clean asset book

It has a very clean asset book. As of June 2007, NPAs as a percentage of net advances were 0%. The zero NPA reflects better quality of assets and prudent NPA coverage on part of the company.

Its leverage ratio has increased from 4.6 times to 5.7 times and the return on equity stood at 19% during June 2007 quarter.

In Q1 FY 2008, Its balance sheet size has grown by 50% to Rs 20,673 crore and loan book size increased by 30% to approx Rs 15000 crore. Equity book rose by 155% to Rs 1573 crore.

Equity issuance will help building critical mass

IDFC will be aided by its recent capital issuance on QIP basis (US$500 million). One of the constraints on the bank’s ability to increase its loan book had been single-party limits – while its tier 1 ratio is high, at 16.1%, its actual capital is low, at Rs 2900 crore (US$700 mn). IDFC cannot lend more than 20% of its net worth to a single borrower (even if it is for different infrastructure projects). Hence, it was hitting a barrier to lending to large infrastructure players. The equity issuance has increased IDFC’s current net worth by almost 70%, thereby increasing lending limits for single but high quality borrowers. This should enable IDFC to keep expanding its loan book significantly and will be EPS accretive.

Investments in non-listed entities also offers good upside

IDFC has certain good strategic investments which provides additional upside. It has 3,690,847shares of NSE bought at Rs 92 crore, which should be worth much more. It now controls 67% in SSKI, SSKI is a privately held domestic corporate finance and institutional securities company based in Mumbai. Through this investment, IDFC and SSKI propose to work together by pooling their relationships and expertise to provide investment banking and capital markets solutions especially to infrastructure clients.

Will continue to attract premium valuations

In FY 2008, we expect the company to register total income of Rs 2573.66 crore and net profit of Rs 705.85 crore. On fully diluted equity of Rs 1294.04 crore and face value of Rs 10 per share, EPS works out to Rs 5.5. The share price trades at Rs 127. P/E works out to 23.3. IDFC’s FY 2008 book value is expected to touch Rs 43, which is discounted 3 times by the current price.

IDFC is an early-cycle play on Indian infrastructure, just as Indian private-sector banks were early-cycle plays on Indian retail banking in the late 1990s or early 2000s. Just as banks like HDFC had always been looking expensive but still gave phenomenal returns in the past due to their ability to capitalise on the tremendous opportunity in retail banking, IDFC is well placed to make most of the infrastructure opportunity unfolding in India (US$ 475 billion to be invested in the next 5 years).

Infrastructure Development and Finance Corporation: Financials




Particulars
0503(12)
0603(12)
0703(12)
0803 (12P)

Income from operations
733.05
1034.69
1566.06
2573.66

Other Income
9.02
2.09
5.23
1.53

Total Income
742.07
1036.78
1571.29
2575.19

Interest Expenses
311.91
500.79
855.46
1451.51

Other expenses
30.67
50.76
77.72
151.96

Operating Profit
399.49
485.23
638.11
971.72

Provisions and Contingencies
64.82
38.75
17.50
24.07

Depreciation
4.00
3.86
4.42
5.22

Profit before tax
330.67
442.62
616.19
942.44

Tax Provision
21.32
51.69
124.10
212.18

Net profit
309.35
390.93
492.09
730.25

Add: Associate's profits
-0.04
0.00
11.83
14.33

Less: Minority int.
0.00
0.17
0.00
10.44

Profit after Tax
309.31
390.76
503.92
705.85

EPS*(Rs)
2.8
3.0
3.9
5.5

*Annualized on fully diluted equity of Rs 1294.04 crore;
(P): Projections
Face Value of Rs 10
Figures in Rs crore
Source: Capitaline Corporate Databases




Infrastructure Development and Finance Corporation: Results





0706 (3)
0606 (3)
Var. (%)
0703 (12)
0603 (12)
Var. (%)

Income from Operations
609.63
338.54
80
1566.06
1034.69
51

Other inc.
0.07
0.63
-89
5.23
2.09
150

Total income
609.70
339.17
80
1571.29
1036.78
52

Interest Expenses
311.15
164.33
89
855.46
500.79
71

Other Expenses
48.58
13.11
271
77.72
50.76
53

Operating profit
249.97
161.73
55
638.11
485.23
32

Prov. & Contengencies
6.32
-0.25
LP
17.50
38.75
-55

Dep.
1.18
1.00
18
4.42
3.86
15

Profit Before Tax
242.47
160.98
51
616.19
442.62
39

Provision for Tax
58.19
29.77
95
124.10
51.69
140

PAT before assoc. profit & MI
184.28
131.21
40
492.09
390.93
26

Add: Associate's profits
0.18
0.04
350
11.83
0.00
0

Less: Minority int.
3.48
0.10
999
0.00
0.17
-100

Profit after Tax
180.98
131.15
38
503.92
390.76
29

EPS*(Rs)
5.6
4.1

3.9
3.0


*Annualized on fully diluted equity of Rs 1294.04 crore;
(P): Projections
Face Value of Rs 10
Figures in Rs crore
Source: Capitaline Corporate Databases