For quite some time now, infrastructure building in India has been all talk and little action. The lethargy in project executions is reflecting on the numbers of Infrastructure Development Finance Co. Ltd (IDFC) as well.
IDFC has reported a 25.6% increase in its fourth quarter net profit to Rs 287 crore. But things are far from rosy, and not just because the net profit number disappointed the Street estimates.
The company’s balance sheet has shrunk by about 1% from a quarter ago. Sure, the loan book increased by 50% compared with a year ago, but the pace has decelerated in the last six months. At the end of March, IDFC’s loans rose by 7% from a quarter ago. Overall disbursements grew at a slower rate of 5.4%.
About 46% of IDFC’s total book is exposed to the power sector. These are crippling times for the sector; the finances of state electricity boards are parlous; power generation companies are finding it difficult to get fuel and these factors present an added risk to the financier’s balance sheet.
That said, IDFC does boast a strong balance sheet, with net non-performing assets at 0.1% of its loan book.
Now, balance sheet growth has lagged loan growth, as the firm chose to finance new loans by selling existing investments rather than borrowing new funds, say brokers. That had a positive effect on its net interest margins, which stayed stable at 3.8% against the previous quarter.
However, overall spreads (on a rolling 12-month basis) fell to 2.2% at the end of March, down 20 basis points from a quarter ago. Moreover, IDFC’s low leverage of 4.2 times puts pressure on its return on equity and profitability. One basis point is one-hundredth of a percentage point.
The key question is how fast will IDFC be able to grow its loan book, especially at a time when interest rates are rising.
There is a persuasive argument that the current fiscal is the last of the 11th Plan; with many sectors lagging targets by as much as half, there would be a pickup in infrastructure investment.
However, investors would rather wait for some action on the ground. That also explains why the stock has underperformed the banking index by a wide margin for some time.
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