>IDFC (ICICI SECURITIES)

We returned positive from IDFC’s management meet, which reinforced our confidence about the company optimising on the infrastructure sector upcycle. Though IDFC’s lending RoEs are likely to remain low, we believe the company’s diversified fee-income stream would prop the reported RoE to ~15%. We expect asset quality to hold up, and maintain our earning estimates with target price at Rs149/share, which implies 9.7% downside from current levels. The stock trades at FY11E P/E and P/BV of 18.7x and 2.7x respectively, which is expensive in our view. We expect the business to witness a slow pick-up and spreads to normalise at ~2.3%. Maintain HOLD.

RICH VALUATIONS

■ Business pick-up sluggish; spreads to normalise at ~2.3%. As the approvals pipeline builds up and disbursements follow with a lag, we expect IDFC’s loan growth to pick up H2FY10 onward. We estimate 20.5% loan CAGR through FY09- 11E, with energy, transport and telecom as the key growth segments. However, erosion of pricing power, probable decline in systemic liquidity and subsequent hardening in interest rates will lead to spreads normalising to 2.2-2.3% (much below the rolling 12-month spreads of 2.6% in Q2FY10).

■ Other income to remain buoyant in a resurging market. Other income streams are expected to remain buoyant, with revenues from asset management and fees from IDFC SSKI being key drivers. Credit-linked fees are also expected to remain buoyant, more so due to loan growth picking up. We expect non-interest income-tototal income to sustain at ~50% through FY09-11E, aided by resurging capital markets.

■ Commendable asset quality. IDFC’s asset quality is commendable, with NNPAs at 0.2% in Q2FY10 and the company abstaining from risky asset-backed lending such as loan-against-shares. We do not foresee material risk to asset quality and assign FY10E & FY11E loan-loss provisions of 27bps each on the outstanding book.

■ Valuations expensive; maintain HOLD. We believe the low RoEs on the lending book will result in reported RoE at ~15%, as per earlier estimate. We maintain our expectation of 20.5% loan CAGR through FY09-11E, sustainable spreads at ~2.3% and nil material risk to asset quality. We maintain earnings CAGR at 22.9% through FY09-11E and our sum-of-the-parts (SOTP) target price at Rs149/share, implying 9.7% downside from current levels. Maintain HOLD with target price of Rs149/share. Spreads holding firm for longer and sharp rise in leverage, leading to higher-thanexpected RoE remain key upside risks.

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