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Sunday, July 17, 2005

IDFC IPO Analysis


Background :
  • Infrastructure Development Finance Company (IDFC) was incorporated as a public limited company in the year 1997. IDFC works closely with GOI and other state governments in formulating policies for participation of private sectors in infrastructure development.
  • IDFC offers non-fund-based products such as guarantees, debt syndication & advisory services on project and financial structuring. The company's main focus is on energy, telecommunication and transportation projects. Sector wise distribution as on FY 2005 on the above stated areas are 36%. 26% and 25% respectively.
  • In order to attract private sector investment in infrastructure projects to supplement public investment, a subsidiary, IDFC Asset Management Company was formed in the year 2002.
  • GOI and IDBI holds 40% shares, other domestic players like SBI, ICICI and others hold 20% of the shares and foreign holdings accounted for 40% of the share capital.
Objects of the Issue :
  • To augment the capital base to meet future capital requirements arising out of growth in business and other general corporate purpose.
  • Enhance its brand name and provide liquidity to its existing shareholders and employees.
  • Meet Issue related expenses.
Strengths :
  • Total Income and profit after tax has been growing at a CAGR of 23% and 21% respectively from FY2001 to FY2005. Growth prospectus is bright as all the indicators show that reform momentum, opportunities for growth and financing opportunities in infrastructure sector continues to grow robustly.
  • Similarly net approval and outstanding disbursements increased at a CAGR of 20% and 48% respectively from FY2001 to FY2005.
  • IDFC is in advantageous position over the banks, as the company does not have to maintain a CRR and SLR. Operating expenses to asset ratio is 1:5.
  • Experienced professionals manage IDFC. As GOI holds 35% of its share capital, the company has the access to the policy makers and thus will be ahead of competitors.
  • At the end of FY 2005, the gross NPA as a percentage of total loan assets and net NPA as a percentage of total loan assets were 0.7% and 0%, respectively. Company's long-term borrowings have been rated as AAA by CRISIL and LAAA by ICRA.
Weakness :
  • IDFC is benefited from certain tax incentives on account of favorable treatment to infrastructure related activities. Any change in tax structure will adversely affect the profitability of the company.
  • About 87% of the total exposure is towards three sectors (i.e. energy, telecom, transport) and top 10 borrowers accounted for 28% of the aggregate exposures. Either negative trend in any of these sectors or financial difficulties of the borrowers will have an impact on the company.
  • The infrastructure financing industry is becoming more competitive. The company faces stiff competition from public and private sector commercial banks and other financial institutions. Many of the competitors have better resources than IDFC.
Valuations :
  • Income from Infrastructure operation for FY 2005 has increased by 28% to Rs.6818 million, where as treasury income has declined by 62% to Rs.368 million.
  • PAT for FY 2005 has increased by 17% to Rs.3040.23 million. NAV as on 31st March 2005 was Rs.18.89. RONW for FY 2005 was 16.10% as against 15.28% in FY 2004.
  • At the price band in the range of Rs.29 to Rs.34, the issue is priced at 1.5 times and 1.8 times its pre-issue book value of Rs.18.89. On FY 2005 unconsolidated EPS (on post-issue equity), P/E works out to 10.7 to 12.6.

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