>IDFC(MOTILAL OSWAL)

Strong performance: IDFC’s consolidated earnings grew 19% YoY in 2QFY09 to Rs2.3b. Despite slower NII growth due to losses on treasury investments, sustained high capital gains and stronger traction in fees led to earnings growth.

1 Balance sheet grew 28% to Rs290b (QoQ flat), driven by 25% growth in loans to Rs214b (QoQ flat). Gross disbursements decreased 26% YoY and 30% QoQ to Rs19b in 2QFY09. Disbursements are down 7% YoY in
1HFY09 to Rs47b. Approvals decreased by 30% YoY to Rs29b in 2QFY09 and 12% YoY to Rs74b in 1HFY09.

2 Management maintained its conscious risk aversion attitude towards asset book growth considering the increasing macro risks and liquidity uncertainties. The management highlighted that its priorities would be (1) liquidity, (2) profitability, and (3) balance sheet growth. Non-interest income increased significantly by 72% YoY to Rs2.2b in
2QFY09 due to 60% growth in fees and 93% growth in capital gains. Asset management fees grew 4.6x to Rs600m in 2QFY09. We expect alternative asset management fees to grow 2.5x in FY09 to Rs1.42b.

3 IDFC’s capital adequacy is strong at 22.2% and Tier I at 18.9%. It said that it has no plans to raise capital in the foreseeable future. Management maintained that it would like to sustain leverage at current level of ~5x.
Upgrade to Buy: We are upgrading FY09 earnings estimates by 2% and cutting FY10 earnings estimates by 3%. The stock trades at 1.1x FY09E BV and 8.3x FY09E EPS and 1x FY10E BV and 6.9x FY10E EPS. The current valuations are attractive and offer favorable risk reward ratio. Upgrade to Buy with a target price of Rs76; an upside of 41%.

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