Loan book growth a worry, but infrastructure revival to help IDFC

Infrastructure financing firm IDFC reported a strong growth in net profit in the quarter to September while managing to keep its asset quality and net interest margins stable. A moderation in loan book growth, however, continues to be a drag on the company's stock.

IDFC's loan book growth has been declining over the last few quarters due to a continued lull in new infrastructure project awards. In the September quarter, its loan book grew by just 3% - lower than the management's guidance of 5-10% growth. However, given the recent clearance of major infrastructure projects by the Cabinet Committee on Investment, IDFC's loan book growth may bottom out in the next few quarters.

Besides, a decrease in loan disbursements led to lower investment banking and loan fees, which are classified as non-interest income. This was offset by a better performance in its asset management business, where its income grew by 51% in the quarter. Overall, its non-interest income was flat at 200 crore, which is nearly one-fourth of total operating income.

One of the major surprises was its stable asset quality. IDFC's gross non-performing assets (NPAs) remained flat at 0.3% of the total loans. However, given the high exposure to the energy sector, IDFC's NPAs may marginally increase in the next few quarters.

To counter any spike in NPAs, the company has been making floating provisioning on a regular basis. As of September 2013, IDFC had a floating provision of nearly 1.7% of the total assets.

Another positive for the investors has been the stable net interest margins (NIMs). Despite tight liquidity this quarter, its NIMs remained flat at 4.1%. This was made possible due to well-matched borrowing and lending durations by the company. Going ahead, its NIMs may remain at this level.

At the current market price, the IDFC stock is trading at a price-to-book value of 1.3. This is at a significant discount to its three-year average P/BV of 1.8. The current stock price factors in concerns on loan growth and asset quality. Any pick-up in infrastructure project awards will see improved investor interest in the company's stock.