Stock Pick from Financial Institution Sector

              HERE IS WHY

• ·         Unlocking of values in different investments.
• ·         Rebound in economic activity to improve financials
• ·         Available at attractive valuation of P/BV of 0.9x

 

The improved outlook of the Indian economy along with the financial services companies is definitely going to help India’s oldest non banking financial services (NBFC), IFCI, which started as a Developmental Financial Institution (DFI) and latter on converted into a NBFC. The economic revival will not only benefit the core business of the company but will also help its huge investment in listed and unlisted space to soar that will ultimately help its shareholder.

 IFCI has already initiated the process to unlock its value in different investments. It has announced partial disinvestment of its stake in National Stock Exchange (NSE) and disinvestment of its entire stake in IFCI Financial Services. IFCI owns 5.5 per cent in NSE and plans to sell 2.5 per cent of its stake while in its financial services company where it owns 95 per cent. Although nothing is clear yet now on pricing front, company clarified that it expects to get around `2000 crore from sale of some of its non-core holdings. Such unlocking of the investments of the company will help to bolster the shareholder’s value.

After struggling in last couple of years to grow its bottomline, company has seen good improvement during FY14. Net profit on consolidated basis had increased by 13.8 per cent on yearly basis to `566 crore for FY14, after witnessing a decline of 28 per cent and eight per cent during FY13 and FY12 respectively. Going forward as economic activity rebounds, IFCI is expected to perform even better. According to media reports, management of the company expects to post bottomline of `750 crore for FY15 an increase of 32 per cent. This will be mainly aided by the treasury profit which is likely to contribute quarter of the total FY15 profits.

Next trigger for the company will be improvement in its asset quality. IFCI had seen sharp deterioration in its asset quality (gross NPA was at 25 per cent and net NPA had reached in double digits in FY13) as economy slowed down and balance sheet shrunk. Nonetheless, initiatives taken by the new management to strengthen recoveries as well as to augment its credit and risk management policies will help company to reduce its NPAs and improve asset quality. IFCI is also trying to get the tag of DFI and is likely to place a proposal to government. This will help company to improve its credit rating that will reduce its cost of funds and will bolster its margins.

 The expected improvement in the financials of the company has attracted smart money and is reflected in the stake of institutional investors, who are continuously increasing their stake in the company since June 2013 quarter and at the end of FY14 stands at 18.13 per cent against 16.83 per cent at the end of June 2013. Shares of IFCI are currently trading at price to book