Prabhudas Lilladher is bullish on IDFC and has recommended accumulate rating on the stock with a target of Rs 160 in its October 31, 2014 research report.
"IDFC reported another muted quarter (13% YoY decline in PAT) as the company pursues its transition into a bank and focuses more on building up its provisioning cushion (increased to 3.6% of loans vs 3.1% in 1Q FY15) and the G-sec portfolio (~Rs125bn currently vs ~Rs75bn in Q2 FY14). On core performance, PPOP growth of 20% YoY was led mainly from extraordinary treasury & investment gains during the quarter, while NII de-grew by 5% YoY on consolidation in loan growth (3.5% YoY de-growth). Opex increased by 42% YoY on key hiring on the transit into a bank."
"Asset quality deteriorated marginally as company restructured loans worth Rs4.63bn during the quarter thus taking the o/s stock of restructured assets to 6.1% from 5.3% in Q1FY15. 87% of restructured loans pertain to energy segment. Management sighted that there could be some restructuring in gas based assets as gas price hike has been delayed but solution has emerged which will help prevent these assets turning into NPAs (Gas based exposure stands at Rs2.4bn or 3.3% of loan book). Also, coal related exposure stands at ~5% of loan book though is not directly linked to coal mine de‐allocation. The company intends to add provisioning buffer on prudential basis for all known risks as it transforms into a bank to avoid any hiccups later on. The board has approved the demerger scheme and all shareholders of IDFC will get shares in the bank in ratio of 1:1. However the demerger plan needs to be cleared by SEBI, RBI, High court etc. Most of investments will be moved to NOHFC like AMC, Investment Banking & Alternate assets. Though in the medium term we believe operational challenges remain but its transition into a bank is well on its way as it adds key executives, focusing on regulatory requirements and build up of adequate provisions. We await further clarity on its strategy of operating the bank but reasonable valuations (1.2x ABV) makes us retain our 'Accumulate' rating on the stock with TP of Rs160 (1.3x Sep‐16 book)," says Prabhudas Lilladher research report.
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