praveen
09-03-2008, 11:48 AM
Infrastructure Development Finance Company Ltd. (IDFC), positioned as a specialized intermediary in infrastructure financing, not only provides project finance but also arranges and facilitates the flow of private capital to infrastructure development by creating appropriate structures and financing vehicles for a wide range of market participants. It also offers non-fund-based products such as guarantees, debt syndication and advisory services on project and financial structuring. The company had a total exposure of Rs. 22000cr. to infrastructure projects in FY07 with a focus on 4 main areas - Energy (39%), Transportation (27%), Telecom & IT (17%) and Industrial & Commercial (14%). The company is likely to be one of the key beneficiaries of the huge infrastructure spend ($520 billion) lined up in the 11th Five Year Plan (2007-12).
Industry
In order to achieve a targeted GDP grow of 9% over 2007-2012 (as per the Planning Commission Estimates) it is clear that infrastructure development will be the key. The 11th Five year plan (2007-12) actually envisages infrastructure spend of $520 billion (approx. Rs. 20,50,000 cr.) during the plan period which is ~2.3 times the expenditure incurred in the 10th Plan. The effort is targeted towards increasing the share of infrastructure in GDP from 5.95% in FY08 to 9.22% in FY12. A substantial chunk of this investment is expected from the private sector. With the plan estimates allocating aggressively for infra outlay, the outlook for infrastructure financing continues to remain robust. Specialized institutions such as IDFC are expected to play a major role in mobilizing funds and channelizing them into infrastructure projects.
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. Splurge in infrastructure investments (US$520 billion to be invested in the next five years) in India will throw up a number of fund-based and especially non-fund-based opportunities. The company is well placed to capitalize on this.
Company
IDFC was established in 1997 as a private sector enterprise by a consortium of public and private investors to provide infrastructure financing. It was mainly started as a government initiative, but the structure of ownership changed in 2005-06 with its IPO. IDFC is a key player with a significant hold on the infrastructure space and is best poised to take advantage of the planned growth in this space. It is likely to emerge as one of the largest lenders to infrastructure projects. The company’s established relationship with the Central government (which holds around 20% equity stake) gives it access to decision makers, which will allow it to play a significant role in the direction of infrastructure policy in the country and keep it a few steps ahead of competition (mainly from banks). In fact, banks are tying up with IDFC to identify, assess and finance infrastructure projects. IDFC is actively engaged in mobilizing and managing third party funds for long-term equity investments in infrastructure. IDFC Private Equity Company is the investment manager of two funds: the India Development Fund (IDF-I) and the India Development Fund- II (IDF-II), with a combined asset under management (AUM) of US$ 680 million. The company has plans to increase the AUM to US$1.5-1.7 bn by FY08. Between the two, the two funds form the largest corpus among the dedicated private equity funds focused on Indian infrastructure. IDFC Private Equity Company will be launching a third fund in FY 2008.
IDFC Project Equity Company was set up in FY 2007 to manage the proposed US$ 2-billion third-party equity component of the India Infrastructure Initiative. The company is keen to leverage its extensive knowledge base to advise offshore and domestic funds on investments in public limited companies in the Indian infrastructure space. It is exploring opportunities made available in the Union Budget 2007-08, which permits mutual funds to launch and operate dedicated infrastructure funds. IDFC Project Equity has tied up with Citigroup, Blackstone and India Infrastructure Finance Company (IIFCL) for deploying US$5 billion in infrastructure projects in India. It has 3,690,847 shares of the National Stock Exchange (NSE), bought at Rs 92 crore. IFCI had recently sold a 7% stake in NSE at a price of approx. Rs. 2400/share. Also, GIC has sold 2% stake in NSE to General Atlantic @ Rs. 2450/share. On this basis, the investment by IDFC is worth Rs. 885.80cr giving a whopping 860% return on investment. It also controls 79.8% in SSKI Securities, 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. In the lending business, it has a balance sheet size of Rs. 25,903cr as at Q3FY08 end and has been growing its balance sheet at a rate in excess of 40% p.a. Of its Rs. 19,242cr loan book (net NPA is 0%), energy, transportation, and telecom sectors constitute 80% of the outstanding.
Key Investment Arguments
IDFC has a market cap of Rs. 23575.7cr, average daily volume of 3258412 shares and Operating Income of Rs. 2451.27cr during the trailing twelve months ended Dec 31, 2007.
It’s Profit before Tax (PBT) and Net profit margins were at 40.0% and 32.1% resp. in FY07 and at 39.5% and 29.2% resp. during the 9 months ended Dec 31, 2007.
The company has achieved a 5-year CAGR of 31.2% in operating income, 25.5% in PBT and 22.0% in Net Profits. Growth has further accelerated in the first nine months of FY08.
IDFC trades at a PE multiple of 32.0 based on trailing twelve month (TTM) consolidated earnings, Price to Book ratio of 4.3 on consolidated book-value as on Dec 31, 2007 and Price to Sales ratio of 9.6 based on TTM consolidated net sales.
Strong performance in 9m ended Dec 31, 2007: IDFC has registered strong growth in the first nine months of FY08. The table given below shows its performance in 9m FY08 vis-à-vis 9m
IDFC has got a robust stream of non-interest based income which forms almost 50% of its net operating income. The break up of the non-interest income for 9m FY08 is as follows:
Rs. cr.
Management Fees 40
Income from IDFC-SSKI 124
Advisory & Other Fee 123
Capital Gains & Dividend 200
Total Non-Interest Income 487
Zero Net NPAs: As on Dec 31, 2007, IDFC had zero Net NPAs. This reflects strongly on their credit appraisal and risk management abilities.
IDFC-SSKI a subsidiary: During the 9 months ended December 31, 2007, the company increased its equity interest from 33.33% to 79.80% in IDFC- SSKI (formerly SS Kantilal Ishwarlal Securities), a Mumbai based mid-size investment banking company. Consequently IDFC-SSKI has now become a subsidiary
company of IDFC.
IDFC is growing its model to build a diversified stream of revenue. The company has targeted to grow non interest income such that it constitutes a greater share in the total income by FY10E. Non interest income, which was 43% of total income in FY07 and 48.7% in nine months ended Dec 31, 2008, is likely to cross the 50% mark by FY10 there by changing the ratio of core and other business in the revenue mix.
IDFC has raised Rs. 2100cr. of Tier I capital in July07 through a Qualified Institutional Placement. The company will utilize ~35% of these funds for its core business and ~40% for the private equity business. IDFC's position as an active borrower remains inherent in the company's business model which also makes it
necessary for it to maintain its AAA credit rating. Rating agencies have indicated a leverage of 7 times in order to maintain the rating. However, with the Debt equity ratio already at 5.1 in FY07 and taking into account its pace of growth, the level would soon have been breached. Hence, the Rs. 2100cr. QIP allows the company to raise the required leverage thereby giving it significant room to grow. They can now have a maximum loan book of Rs. 38,500cr (as against Rs. 19242cr at present), based on their Net worth of Rs. 5,511cr as on Dec 31, 2007, without affecting their credit rating.
Key Concerns
There are risks of margin compression, as the infrastructure financing space is keenly contested. Being an NBFC, IDFC is dependent on wholesale funding. Hence, high interest rates will remain a risk. However, the interest rates seem to have peaked in India and are expected to ease in the medium term.
IDFC has a 15-20% market share in financing private infrastructure projects. Although infrastructure has a share of 8- 9% of the banks’ portfolios, IDFC’s core business faces competition from commercial banks. Banks are able to raise funds at cheaper rates from current account & saving account deposits whereas IDFC being an NBFC does not accept deposits.
IDFC has been able to maintain ‘NIL’ NPAs. However, large ticket lending to infrastructure projects and a subsequent default from even a single client could result in a significant rise in NPA levels, denting its future earnings.
Latest Developments
Private equity players J P Morgan and IDFC are learnt to be eyeing a minority stake in Hyderabad-based logistics company Seaways. The deal is likely to be valued at over Rs. 250cr. Seaways, which clocked a revenue of Rs. 600cr last fiscal, is likely to close this financial year with revenues of Rs. 750cr and a profit of Rs. 20cr. It provides integrated and turnkey services in shipping, supply chain logistics, warehousing, container handling and international trade and has 27 branches in the country.
Larsen & Toubro (L&T), Infrastructure Development and Finance Company (IDFC), Lehman Brothers and Singapore-based private equity (PE) firm Amansa Capital together have picked up a 7% stake in Hyderabad-based construction firm B Seenaiah & Co. Projects (BSCPL) for Rs. 152cr. IDFC-SSKI acted as exclusive financial advisor to BSCPL for the deal.
Conclusion
This is a good stock to buy at the current market price of Rs. 169. If everything goes well, the price is likely to appreciate to Rs. 255.0, within 12 months, translating into a gain of about 51%.
Industry
In order to achieve a targeted GDP grow of 9% over 2007-2012 (as per the Planning Commission Estimates) it is clear that infrastructure development will be the key. The 11th Five year plan (2007-12) actually envisages infrastructure spend of $520 billion (approx. Rs. 20,50,000 cr.) during the plan period which is ~2.3 times the expenditure incurred in the 10th Plan. The effort is targeted towards increasing the share of infrastructure in GDP from 5.95% in FY08 to 9.22% in FY12. A substantial chunk of this investment is expected from the private sector. With the plan estimates allocating aggressively for infra outlay, the outlook for infrastructure financing continues to remain robust. Specialized institutions such as IDFC are expected to play a major role in mobilizing funds and channelizing them into infrastructure projects.
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. Splurge in infrastructure investments (US$520 billion to be invested in the next five years) in India will throw up a number of fund-based and especially non-fund-based opportunities. The company is well placed to capitalize on this.
Company
IDFC was established in 1997 as a private sector enterprise by a consortium of public and private investors to provide infrastructure financing. It was mainly started as a government initiative, but the structure of ownership changed in 2005-06 with its IPO. IDFC is a key player with a significant hold on the infrastructure space and is best poised to take advantage of the planned growth in this space. It is likely to emerge as one of the largest lenders to infrastructure projects. The company’s established relationship with the Central government (which holds around 20% equity stake) gives it access to decision makers, which will allow it to play a significant role in the direction of infrastructure policy in the country and keep it a few steps ahead of competition (mainly from banks). In fact, banks are tying up with IDFC to identify, assess and finance infrastructure projects. IDFC is actively engaged in mobilizing and managing third party funds for long-term equity investments in infrastructure. IDFC Private Equity Company is the investment manager of two funds: the India Development Fund (IDF-I) and the India Development Fund- II (IDF-II), with a combined asset under management (AUM) of US$ 680 million. The company has plans to increase the AUM to US$1.5-1.7 bn by FY08. Between the two, the two funds form the largest corpus among the dedicated private equity funds focused on Indian infrastructure. IDFC Private Equity Company will be launching a third fund in FY 2008.
IDFC Project Equity Company was set up in FY 2007 to manage the proposed US$ 2-billion third-party equity component of the India Infrastructure Initiative. The company is keen to leverage its extensive knowledge base to advise offshore and domestic funds on investments in public limited companies in the Indian infrastructure space. It is exploring opportunities made available in the Union Budget 2007-08, which permits mutual funds to launch and operate dedicated infrastructure funds. IDFC Project Equity has tied up with Citigroup, Blackstone and India Infrastructure Finance Company (IIFCL) for deploying US$5 billion in infrastructure projects in India. It has 3,690,847 shares of the National Stock Exchange (NSE), bought at Rs 92 crore. IFCI had recently sold a 7% stake in NSE at a price of approx. Rs. 2400/share. Also, GIC has sold 2% stake in NSE to General Atlantic @ Rs. 2450/share. On this basis, the investment by IDFC is worth Rs. 885.80cr giving a whopping 860% return on investment. It also controls 79.8% in SSKI Securities, 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. In the lending business, it has a balance sheet size of Rs. 25,903cr as at Q3FY08 end and has been growing its balance sheet at a rate in excess of 40% p.a. Of its Rs. 19,242cr loan book (net NPA is 0%), energy, transportation, and telecom sectors constitute 80% of the outstanding.
Key Investment Arguments
IDFC has a market cap of Rs. 23575.7cr, average daily volume of 3258412 shares and Operating Income of Rs. 2451.27cr during the trailing twelve months ended Dec 31, 2007.
It’s Profit before Tax (PBT) and Net profit margins were at 40.0% and 32.1% resp. in FY07 and at 39.5% and 29.2% resp. during the 9 months ended Dec 31, 2007.
The company has achieved a 5-year CAGR of 31.2% in operating income, 25.5% in PBT and 22.0% in Net Profits. Growth has further accelerated in the first nine months of FY08.
IDFC trades at a PE multiple of 32.0 based on trailing twelve month (TTM) consolidated earnings, Price to Book ratio of 4.3 on consolidated book-value as on Dec 31, 2007 and Price to Sales ratio of 9.6 based on TTM consolidated net sales.
Strong performance in 9m ended Dec 31, 2007: IDFC has registered strong growth in the first nine months of FY08. The table given below shows its performance in 9m FY08 vis-à-vis 9m
IDFC has got a robust stream of non-interest based income which forms almost 50% of its net operating income. The break up of the non-interest income for 9m FY08 is as follows:
Rs. cr.
Management Fees 40
Income from IDFC-SSKI 124
Advisory & Other Fee 123
Capital Gains & Dividend 200
Total Non-Interest Income 487
Zero Net NPAs: As on Dec 31, 2007, IDFC had zero Net NPAs. This reflects strongly on their credit appraisal and risk management abilities.
IDFC-SSKI a subsidiary: During the 9 months ended December 31, 2007, the company increased its equity interest from 33.33% to 79.80% in IDFC- SSKI (formerly SS Kantilal Ishwarlal Securities), a Mumbai based mid-size investment banking company. Consequently IDFC-SSKI has now become a subsidiary
company of IDFC.
IDFC is growing its model to build a diversified stream of revenue. The company has targeted to grow non interest income such that it constitutes a greater share in the total income by FY10E. Non interest income, which was 43% of total income in FY07 and 48.7% in nine months ended Dec 31, 2008, is likely to cross the 50% mark by FY10 there by changing the ratio of core and other business in the revenue mix.
IDFC has raised Rs. 2100cr. of Tier I capital in July07 through a Qualified Institutional Placement. The company will utilize ~35% of these funds for its core business and ~40% for the private equity business. IDFC's position as an active borrower remains inherent in the company's business model which also makes it
necessary for it to maintain its AAA credit rating. Rating agencies have indicated a leverage of 7 times in order to maintain the rating. However, with the Debt equity ratio already at 5.1 in FY07 and taking into account its pace of growth, the level would soon have been breached. Hence, the Rs. 2100cr. QIP allows the company to raise the required leverage thereby giving it significant room to grow. They can now have a maximum loan book of Rs. 38,500cr (as against Rs. 19242cr at present), based on their Net worth of Rs. 5,511cr as on Dec 31, 2007, without affecting their credit rating.
Key Concerns
There are risks of margin compression, as the infrastructure financing space is keenly contested. Being an NBFC, IDFC is dependent on wholesale funding. Hence, high interest rates will remain a risk. However, the interest rates seem to have peaked in India and are expected to ease in the medium term.
IDFC has a 15-20% market share in financing private infrastructure projects. Although infrastructure has a share of 8- 9% of the banks’ portfolios, IDFC’s core business faces competition from commercial banks. Banks are able to raise funds at cheaper rates from current account & saving account deposits whereas IDFC being an NBFC does not accept deposits.
IDFC has been able to maintain ‘NIL’ NPAs. However, large ticket lending to infrastructure projects and a subsequent default from even a single client could result in a significant rise in NPA levels, denting its future earnings.
Latest Developments
Private equity players J P Morgan and IDFC are learnt to be eyeing a minority stake in Hyderabad-based logistics company Seaways. The deal is likely to be valued at over Rs. 250cr. Seaways, which clocked a revenue of Rs. 600cr last fiscal, is likely to close this financial year with revenues of Rs. 750cr and a profit of Rs. 20cr. It provides integrated and turnkey services in shipping, supply chain logistics, warehousing, container handling and international trade and has 27 branches in the country.
Larsen & Toubro (L&T), Infrastructure Development and Finance Company (IDFC), Lehman Brothers and Singapore-based private equity (PE) firm Amansa Capital together have picked up a 7% stake in Hyderabad-based construction firm B Seenaiah & Co. Projects (BSCPL) for Rs. 152cr. IDFC-SSKI acted as exclusive financial advisor to BSCPL for the deal.
Conclusion
This is a good stock to buy at the current market price of Rs. 169. If everything goes well, the price is likely to appreciate to Rs. 255.0, within 12 months, translating into a gain of about 51%.