IDFC – A long term investment worthy business

From a high of 185 in January 2013, IDFC has grinded down to 128. That’s a fall of close to 30% for a large cap financial institution.

We like IDFC as a good long term portfolio pick. So this 30% correction has tempted us to do an analysis of the company. And with Banking Licenses being the hot topic, we give our two cents that it is quite possible that IDFC may get one by next year. But what we just said is mere speculation. Don’t believe us. 🙂 This is because there is a high probability that someone on the inside knows something about the licenses and hence the stock has corrected so much(!)

So, for the time being, we keep aside IDFC’s banking foray and look at its existing businesses and valuations compared to historical averages.

IDFC



IDFC is an infrastructure finance institution providing end to end financing and project implementation services. The company also provides advisory, PE and AMC services to name a few.

Sales

Company grew at a fast pace during the last decade. Its sales have increased from 424 crores in 2003 to around 6100 crores in 2012. That’s a CAGR of around 34%. Company came out with its IPO in 2005 at Rs 34 per share. Since then, sales have increased at a similar rate of 35% per annum.

IDFC Net Sales
IDFC – Net Sales (2003-2012)

Profits

During the same period, profits have grown from 180 crores to 1600 crores at rate of 27% plus.

IDFC Net Profits
IDFC – Net Profits (2003-2012)

EPS & Dividends


Earnings (per share) have moved up from 1.8 to 10.3 in 2012. In line with EPS, dividends have started increasing in recent past and now (in 2013) stand at Rs 2.6 per share. In last 5 years (barring 2009), company has continuously increased its dividend per share (1.2, 1.2, 1.5, 2.0, 2.3, 2.6).

IDFC EPS Dividend Per Share
Earnings & Dividends Per Share (2003-2012)

The dividend payout ratio has also stabilized in the band of 20-23%, which is decent considering the high growth rate of company’s business. A detailed comparison between EPS, DPS and their respective growth rates can be found in table below-

IDFC EPS Dividend Per Share
Detailed EPS & DPS Data – Growth Rates & Assumptions

IDFC is a financial institution and hence it makes more sense to analyze company’s Price to Book Value to gauge how over- or undervalued the company is.


Price/Book Value & P/E Ratio Analysis

Company has grown its book value from 16 to 81 in last ten years. That’s a CAGR of more than 20%.

IDFC Book Value
Book Value Per Share (2003-2012)

We analyzed historical data to check the P/BV multiples at which IDFC has traded. Average P/BV after listing (in 2005) for IDFC stands at close to 2.3. Also it has oscillated in a P/BV range of 1.0 to 5.0. At present, the stock is available at a P/BV of 1.6. That itself points to a 30% undervaluation from historical averages perspective.


If you look at Price to Earnings multiple too, average PE commanded by IDFC is close to 16. The stock currently trades at a PE of less than 11 (TTM). And if you are enterprising enough to consider future earnings, then stock is available at a forward PE of 9.2 (FY 14) & 7.7 (FY 15)! And a PE of 8 is considered apt for a no-growth company. 🙂

Below graphs show how IDFC is currently positioned on parameters like P/E & P/BV when compared to its historical averages and FY 14 & 15 estimated figures.

IDFC Price to Book Value PBV
P/BV Comparison – Current, Historical Average & Estimated (2014,  2015)
IDFC Price to Earning Per Share PE
P/E Ratio Comparison – Current, Historical Average & Estimated (2014. 2015)

Final Words


The company, though well managed and growing at a decently fast pace, seems to be undervalued. We have not analyzed management, business, etc as this post was more to do with valuations based on simple historical parameters. But being headed by Deepak Parekh and his team, it is assumed that management would be doing a decent job. In case you are interested in understanding more about the business, management and other factors, we suggest a simple Google search. It will throw a plethora of brokerage reports analyzing the same. You can also access company’s latest Annual Report here.

Now with a sustained ROE of close to 15%, a business like IDFC’s should command a multiple higher than what it currently trades at. And though we love dividends, we don’t expect IDFC to dole out generous dividends to its investors due to its fast growth. Even then the stock is currently available at a decent yield of 1.8%. And with dividend growing year on year, this Yield-On-Cost is bound to increase in future.

But remember one thing, IDFC is interested in getting a banking license. And there are high chances that it might get it. But we cannot be sure of this unless we are in RBI’s decision making committee. 😉 So if you do invest in the company, be ready to accept volatility in its share prices due to negative or positive news flow.

Disclosure – No positions in IDFC.

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