Stock Pick From The Finance Sector

Here Is Why:

• A significant rise in non-interest income
• The AMC business outperformed its peers in the recently concluded quarter
• A healthy dividend payment history

The IDFC counter may look like a dubious investment prospect at this point, as the company recently hit a four-year low of Rs 86.10 following removal of the counter from the MSCI Standard and Large-Cap indices. However, we think otherwise. After this, the prices of the stock rose sharply, which indicates that this is a temporary blip that typically happens in situations like these. However, the fundamentals of the company remain intact, and we believe that any fall in prices should be used as an opportunity to add this scrip to your portfolio.

The asset management business of the company has been on a rise. In Q1FY14, its assets under management (AUM) have risen by 40 per cent as against an average industry growth of 20 per cent. The market share of this business has also grown from four per cent in Q1FY13 to 4.6 per cent in Q1FY14. The icing on the cake is that it has consistently been a dividend paying company, with the current yield standing at 2.70x for FY13.

IDFC’s non-performing assets stand at 0.2 per cent for the June 2013 quarter. However, the management has been stressing on the fact that these NPA levels are not sustainable and may rise to the tune of 1-1.5 per cent in the next 12 months. This is mainly due to higher exposure (40 per cent) to the energy sector. The company is expecting that the biggest restructuring will happen in this sector, especially in gas-based assets. It is confident that gas production will ramp up going forward, which in turn will enable these plants to that will be commissioned in the next 12 months to operate at PLF levels good enough to service their debts.

With public sector banks becoming increasingly risk-averse, the company is well placed to cash in on the opportunity that will open up for other players going forward. It must also be noted here that IDFC carries a large counter-cyclical provision (1.9 per cent of loans as of Q1FY14) and intends to take this coverage to levels over two per cent to tide over the prevailing adverse macro environment. Moreover, more than 70 per cent of the energy portfolio is operational in nature and hence has significantly lower risks. The exposure to operational road projects has steady traffic build-up, while telecom exposure is largely to big players with strong balance sheets. This acts as a significant cushion to the future earnings of IDFC against asset quality deterioration.

There has been significant improvement in the financial performance of the company. More importantly, the non-interest income of the company for the recently concluded Q1FY14 has witnessed a robust growth of 86 per cent on a YoY basis to come in at Rs 268 crore. This rise can be attributed to treasury trading gains, where the fixed income trading gains witnessed a jump of 10x on a YoY basis. Post the recent correction in prices, the stock is currently trading at a P/BV of 1.04x. We believe that the stock has the potential to reach a level of Rs 121 in the next one year considering a price-to-book value of 1.4x its FY14E.