MOSL: IDFC (Buy)-Subdued performance by IDFC Bank hurts overall results

​IDFC: Subdued performance by IDFC Bank hurts overall results

(IDFC IN, Mkt Cap USD1.3b, CMP INR62, TP INR81, 30% Upside, Buy)

• IDFC Limited’s (IDFC) operating profit declined to INR3.3b in 4QFY17 from INR5.5b in the previous quarter (YoY comparison not available), primarily due to lower contribution from IDFC Bank. Lower sequential margins and trading losses (v/s trading gains in the prior quarter) drove subdued performance at the bank (refer to our latest note here).
  
• IDF business: IDFC IDF (now rechristened IDFC Infrastructure Finance) continues to expand its loan book (up 19% QoQ from INR22.6b to INR26.8b, driven by an increase in the number of accounts from 36 to 37). While growth has been strong, we believe that sustaining such levels would be difficult due to the operating environment, especially after the rate cut by banks. Note that IDF can refinance only projects that have been operational for at least a year. Given the scarcity of such projects right now, banks are unwilling to let go of such projects. As a result, management expects spreads to compress from 2% now to ~1.4%. IDF is well capitalized, with a CAR of 28.9%. Operating profit was INR190m v/s INR220m in 3QFY17.
  
• AMC business: IDFC acquired the 25% stake held by Natixis Global in the AMC business in 4QFY17 for INR2.44b. Average AUM was largely stable QoQ (+14% YoY) at INR595b, with share of equity AUM stable at 22%. However, total income grew in excess of AUM growth at 8% QoQ, while expense growth was relatively modest (+2% QoQ). This led to 16% QoQ growth in operating profits in the quarter to INR370m.