IDFC’s Q1FY09 results were broadly in line with our estimates with 60.9% y-o-y increase in NII and 19.9% y-o-y increase in net profits.
Net interest income (NII) continued to display encouraging trends. It increased 60.9% during the recently concluded quarter, largely driven by the infrastructure income, which accounted for 83% of the total NII. While we don’t expect any huge growth in the loan book, we are confident about the company’s ability to maintain its spreads.
Also, it should continue to drive income from the core activities, with non-interest income playing a major role in the long term. Its expertise in infrastructure lending, along with consistent efforts towards diversification of the loan book, will help in defying the prevailing economic slowdown and yield attractive returns.
In addition, its various subsidiaries should continue to add value to the consolidated business, especially the investment banking segment and the recently acquired Standard Chartered AMC.
Our target price of Rs130 FY09E for IDFC is based on the sum-of-the-parts valuation methodology. We have arrived at a per share value of Rs105 for the standalone banking business by using the three-stage discounted Equity Cash Flow method and have assumed a 15% cost of equity and a 13.1% terminal growth rate.