IDFC affirmed at `BBB-`/`Fitch AAA(ind)`

Fitch Ratings has affirmed India-based Infrastructure Development Finance Company Limited's (IDFC) 'BBB-' Long-Term Foreign-Currency Issuer Default Rating (LT FC IDR) with a Negative Outlook and 'Fitch AAA(ind)' National Long-Term rating with a Stable Outlook. The agency has also affirmed the ratings on IDFC's INR debt programmes. A complete list of rating actions is provided at the end of this commentary.

The affirmation reflects IDFC's healthy capitalisation levels that are necessary for its business, its efficient risk management practices that have helped it manage its risks well so far, and the benefits to its funding profile from its strong linkages with the government of India (GoI), stemming from its important role in infrastructure project financing - a high priority area for GoI. These factors help mitigate the concentration risks in IDFC's business - high single name concentration in its loan portfolio that is primarily funded by institutional lenders.
The Negative Outlook on the LT FC IDR reflects the Negative Outlook on India's 'BBB-' sovereign ratings (please see, "Fitch Revises Outlook on Indian FIs to Negative, Affirms IDRs", dated 20 June 2012 at www.fitchratings.com).
Fitch expects IDFC to maintain its asset quality and credit costs at far superior levels compared with the system average. However, given IDFC's primarily wholesale funded nature, the ratings could be affected it were to face funding pressures from a spike in non-performing loans (NPLs) and asset quality uncertainties. Similarly, a weakening of its capitalisation could also result in a rating downgrade. An expansion into non-core business lines and increased reliance on short-term funding or international funding could also put pressure on the ratings.
The broad infrastructure sector in India faces major challenges from a range of factors, including fuel supply issues, high input costs, delays in construction/requisite clearances and the slowing economic growth. Although IDFC's asset quality has remained stable so far (gross and net NPLs were low at 0.30% and 0.15% at end-March 2012), Fitch remains cautious on concentration risks inherent in infrastructure financing and the harsh industry operating environment. That being said, IDFC's capitalisation and profitability are likely to continue providing a strong cushion against any spike in NPLs. Also, profitability is expected to remain superior to that of commercial banks' even after providing for some cyclical reduction in net interest margins.
IDFC remains largely wholesale-funded, and while its status as an infrastructure finance company has helped it diversify its funding profile by providing access to external commercial borrowings, Fitch notes a large increase in short-term funding (15% of assets at end-FY12 versus 8% at end-FY11). IDFC's refinancing capabilities are underpinned by its adequate credit profile and its strong linkages with GoI. While these strong linkages with GoI may lead to possible liquidity or capital support, if required under extra-ordinary circumstances, these are not a factor at the current level of the ratings.
IDFC was established in 1997 by GoI, which owns the largest stake (17.3% at end March 2012). The government-owned Life Insurance Corporation of India also held a 10.6% stake in IDFC at end-March 2012. The company finances infrastructure projects and manages infrastructure-focused private equity funds, an investment bank, and a retail mutual fund.
A full list of list of rating actions is as below:

• LT FC IDR affirmed at 'BBB-'; Outlook Negative
• National Long-Term rating affirmed at 'Fitch AAA(ind)'; Outlook Stable
• INR90bn non-convertible debentures affirmed at 'Fitch AAA(ind)'
• INR15bn zero-coupon bonds affirmed at 'Fitch AAA(ind)'
• INR79.29bn long-term infrastructure bonds affirmed at 'Fitch AAA(ind)'
• INR470bn long-term debt programme affirmed at 'Fitch AAA(ind)'

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.