IDFC Ltd’s September quarter results beat Street forecasts by a wide margin. The consensus brokerages’ forecast had the financier report a 6% drop in net profit. But IDFC’s September quarter net profit of Rs 524.2 crore was 55% more than a year ago. Whether that would be enough to calm investor concerns about the company is altogether another question.
The positives first: the company tightened its belt; on a rolling 12-month basis, cost-to-income ratio is the lowest in six quarters. IDFC also managed a better spread on its assets. Thus, net interest income grew by one-third during the quarter. After a poor June quarter, when operating profit fell 1.5%, IDFC made up with a 38% rise in the three months ended September.
However, non-interest income continued to be a drag on the company because of a slowdown in the broking and investment banking business. At the earnings before interest and tax level, profit fell 60%. Secondly, and this is a more serious concern, the macroeconomic environment and the slowdown in infrastructure spending are starting to tell on IDFC’s loan book.
• Rough patch (PDF)
•Quarterly performance (PDF)
The company’s net loans grew only 14.3% in the September quarter from a year ago. Compared with the June quarter, growth was 4.7%—just about on par with the banking sector. That is much slower than the 30% year-on-year growth seen in the three months ended June and the 50% rise in the March quarter. Gross approvals and gross disbursements dropped over 50% each from a year ago. However, IDFC had indicated that it would make up for lower loan growth by targeting higher return on assets, which it has done.
Secondly, although IDFC’s gross non-performing assets as a portion of total advances is a benign 0.19%, down 4 basis points from a year ago, the lender has a sizeable exposure to the power sector. Overall exposure to the energy sector stood at 43%, just below the 46% seen at the end of the March quarter. Outstanding disbursements to this sector, too, stood at 44%.
Already some banks, notably Punjab National Bank that rejigged Rs 2,150 crore worth of loans, appear jittery about this sector because of fuel shortages and low merchant power rates. As JPMorgan India Pvt. Ltd noted after the June quarter results, “Management remains confident that its power loan book would remain pristine on asset quality, but did not rule out some restructuring in the medium term.”
That would be something that could determine the future course of the stock, which has underperformed the broader markets so far this year.
We welcome your comments at firstname.lastname@example.org
PDF by Ahmed Raza Khan/Mint