Mumbai: Private sector non-banking finance company Infrastructure Development Finance Co. Ltd (IDFC) plans to approach the Reserve Bank of India (RBI) in the “next few days” to apply for “infrastructure non-banking finance company” (NBFC) status, said executive director and board member Vikram Limaye.
The infrastructure NBFC status, expected in 30 days from the date of applying, will allow IDFC to improve fund mobilization and ease overall funding pressure on the firm. According to Limaye, the status will give it higher single-party/group exposures, and borrowing from banks could increase to 20% of net worth. Non-infrastructure NBFCs can currently raise up to 15% of net worth.
Additionally, the firm’s plan to raise Rs3,500 crore over the next 12 months is a “pre-emptive” bid to raise capital and stay relevant with the “SBIs of the world”, Limaye told Mint in an interview last week. The state-owned State Bank of India is India’s largest lender.
“Unless we are able to commit larger sums we will get marginalized and be mere observers as opportunity passes us by,” Limaye said of the fund-raising.
“In the next three years, the opportunity in the infrastructure landscape looks quite attractive so we think it is a good time to capitalize on the opportunity,” he said, estimating that infrastructure lenders could stand to lend close to Rs3 trillion over the next three-four years, especially in power, roads and gas distribution.
The increase in capital will also allow IDFC to lend more funds while staying within limits stipulated by RBI, currently at 15% of equity while lending to a company and 40% for lending to a group.
Strategic move: IDFC’s Limaye says the status will give the firm higher exposure, and borrowing from banks could increase to?20% of net worth.
“RBI’s infrastructure NBFC norms should help lower IDFC’s borrowing costs as interest rates move north. However, considering how concentrated IDFC’s loan book already is they may not take benefit of increased single/group exposure” said Aditi Thapliyal, banking lead analyst with UK-based investment bank Execution Noble.
However, the application for infrastructure NBFC status means that IDFC’s plan to become a bank will be pushed to the back burner, Limaye conceded.
“We are not pushing for a bank, we will like to see how the infra NBFC unfolds,” he said, adding that it was unlikely “the banking thing is going to materialize for the next couple of years”.
Besides, he said, if a bank status is worth pursuing at a later time, nothing prevents IDFC from doing so.
Earlier this month, managing director?and?chief executive officer Rajiv Lall was quoted in the Financial Times as saying that his firm needs to triple its footprint to stay relevant in the infrastructure space.
That will not be too hard, say analysts. “IDFC is well placed to triple its balance sheet,” said A.S.V. Krishnan, research analyst with Ambit Capital Pvt. Ltd. “Earlier they were growing at 20% every year, but now they feel that opportunities are plenty and they can pick and choose at viable rates and attractive yields.”
Thapliyal said she expects “equity to dominate the management’s guidance of a near trebling of the balance sheet by 2014 and a jump in leverage to up to seven times from 4.8 times now”.
The large infusion of capital, though, does not necessarily mean the good will be smooth. While IDFC took advantage of the gap in lending in fiscal 2010 when banks shied away from infrastructure firms, it may no longer be a cakewalk as banks get more aggressive, Krishnan cautioned.
“It may not be sustainable because if they start competing with banks, these banks will start to undercut and IDFC will have to reduce rates,” he said, pointing out that IDFC’s margins in fiscal 2010 were around 3.3%, better than the 2.3-2.7% in fiscal 2009.
“If we look at the track record of the company it is well placed to pick and choose the opportunities and even if margins shrink they can make up by serving the same companies through their other businesses such as private equity, investment banking,” Krishnan said.
Limaye said strong growth in the project finance business, along with power, were the highlights of fiscal 2010 and that he expects the momentum to continue.
“Project finance sanctions (in fiscal 2010) surged to Rs30,000 crore, compared with Rs10,000 crore the previous year (fiscal 2009), disbursements rose from Rs8,000 crore to Rs12,000 crore,” Limaye noted, adding that in the field of power finance, spending on power generation would have to be matched by investments in transmission and distribution projects.
But he also expressed concern over unbridled competition in the infrastructure area, especially in the telecom sector where companies are currently engaged in bids for third generation (3G) spectrum that will allow greater speeds and large quantities of data to be transmitted wirelessly.
“As an equity owner, I am concerned about the bids, it’s expensive, you have to make revenues, but as a large telecom operator you cannot not have a 3G offering,” he said. “Even the operators are quite concerned the way the bidding is going. It’s not clear whether they can make money at these levels.”
As for analyst concerns about IDFC’s return on equity (RoE), Limaye says the idea is to give investors returns in the long term.
“We can easily not raise capital and demonstrate a 20% RoE, but that would not position us appropriately for the long term,” he said. “We believe we have to do some pre-emptive capital-raising so that we have the ability to do business with core clients in this infrastructure growth. Temporarily it will lead to a dip in RoE, but it will come up quite quickly.”