Time To accumulate IDFC LTD: Stock poised to ride the coming economic upturn

Infrastructure development finance corporation (IDFC) was formed in 1997 with the major objective of securing private capital for commercially viable infrastructure projects. The company was notified as a public financial institution in 1999. The company also secured a merchant banker license in 2000 and formed an Asset Management Company (AMC) in 2002 as subsidiaries.

IDFC has managed to grow at a steady clip above the industry average over the past decade while maintaining the quality of the loan book with minimal NPA (Non-performing Asset) till date. As per March 21 2012 Financials, gross NPA stood at 0.30% and Net NPA at 0.15%. This compares extremely favorably when compared with PSU Banks where the figures stand near 3-4% currently. The fact that the NPA has been controlled even in this challenging economic environment speaks volumes of the quality of the lending process.

Key Financial Highlights.

IDFC’s total income touched Rs 6435 crs in March 2012 ( a 34% compounded annual growth rate-CAGR over the last 10 years). The profit after tax was Rs 1554 crs ( 27% CAGR growth over the last 10 years) which means a Earning per share (EPS) of Rs 10.70 per equity share. The stock was trading at Rs 158.75 on Feb 4 2013 implying a P/E ratio of 14.83 times.

The book value per share is Rs 81(March 2012) and at current market prices the price to book value ratio is 1.96 times meaning that the market players are willing to pay for a premium for a quality stock. The company has an very good track record of uninterrupted dividend payments over the last 7 years. The dividend for the last financial year was Rs 2.30 per share which works out to a dividend yield of 1.44%. The company’s dividend policy is conservative as it has been retaining cash for funding growth as the dividend payments have grown at a CAGR of 10% over the last ten years whereas the PAT has grown by 27% during a similar period.

While the fundamentals are definitely solid, it might be appropriate to have a look at the technicals of the stock to check if the charts are in agreement with the fundamentals.

Key Technical comments

• The stock is trading above the 200 day moving average (pink) which means that the long term trend is bullish.
• The stock is trading below the 50 day moving average(blue) indicating that the intermediate trend is neutral and stock is under profit taking.
• Both the 50 day and the 200 day MA are rising implying that the stock has more upside from the current levels.
• A bullish triangle pattern breakout was completed in Oct 2012 (marked by blue arrow) which provides for a minimum target of Rs 195 in the coming weeks.
• Our Elliot Wave counts are indicating that the current uptrend could be a third wave with targets of 185/220 for the intermediate term(3-6 months).
• A review of our bullish stance will be warranted on a closing below Rs 140/45 zone where there is rising trendline support.

What’s not so good?
A factor which can go against this investment is the fact that there has been no clear signal from the RBI towards a longer term relaxation in the tough monetary policy stance it has been adopting. A high interest rate policy of the Central Bank can affect business volumes and impair asset quality.

Even the technicals have a few issues to consider before investing. The RSI, for example, has been making lower tops over the past few weeks while the stock has been making new highs which means we are in  a retracement pattern. This is unlikely to disturb the longer term uptrend, though it may mean that there could be a better entry point in the near future which is why we are recommending a buy on dip strategy.

To invest, or not to invest?
With no obvious clue as to how the RBI is going to set the longer term interest rates, it’s hard to tell what the macro environment will be like in 2013.  But our analysis of the Bond market and the change in positioning by many funds towards the longer duration bonds, it does appear that there are rate cuts in the offing. The RBI has cut policy rates by 25 bps cut in repo rates and CRR in the Jan 29 credit policy meet. A long term downward movement in interest rates may be in the offing which means that this could be the right time to add this stock especially on minor corrections. The economic reforms announced over the last quarter and the continuing emphasis on correcting the fiscal deficit by the Government increases the scope of a substantial improvement in the macro environment.

The stock is part of the S&P CNX Nifty index with adequate liquidity which means that it should not be very difficult for funds to take positions in the stock in a short time.

We recommend a strong buy at current levels (159 levels) and on dips to a maximum of 6-7% of one’s portfolio.