Accumulate IDFC; target of Rs 165: Prabhudas Lilladher

Prabhudas Lilladher is bullish on IDFC and has recommended accumulate rating on the stock with a target of Rs 165 in its October 25, 2012 research report.

“IDFC, despite lumpy asset risks, we factor credit costs of 40-50bps over FY13-15 as floating provision of Rs10bn provide comfort and hence, our downgrade is not based on rising credit costs. Also, IDFC remains a play on flow businesses which has seen some buoyancy lately and hence, we have also factored in Rs3.5-4.0bn of treasury gains every year + 1.8x jump in flow business profit and these, coupled with improving operating metrics, would at best take ROEs to ~15‐16% over FY15.”

“We get ROAs of ~2.9-3.0% for IDFC by factoring in (1) loan growth of 22-23%, considering re-financing opportunities continue (2) we have assumed current spreads to remain stable as lower funding costs net-off lower yields on re-financing (3) lending-related fees to continue to grow at +20% YoY over FY13-15 and (4) benefits of operating leverage to sustain with cost-income coming off to 15% from 18% currently. We believe, we have been generous on most metrics and see potential upsides to our growth assumptions and hence, upside catalysts to ROAs are limited.”

“With the ongoing leveraging up of the B/S, IDFC will achieve peak leverage of 5.5-5.7x by FY14-15 (last reached FY07) and with limited room for further ROA improvement beyond 2.9-3.0%, we believe ROEs will get capped at 15-16% assuming peak leverage of 5.75x. We rollover our PT to Rs165/share based on 1.6x FY14 book and downgrade to accumulate,” says Prabhudas Lilladher research report.

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