Buy IDFC – Citigroup

Exclusive CoverageCitigroup Research in a detailed research report released just a while ago has initiated coverage on India’s premier and best Infrastructure Financial institution – Infrastructure Development and Finance Corporation – IDFC. Citi has recommended a BUY with a Target Price of Rs 140 from current levels of Rs 110.

IDFC is the most levered and broad-based infrastructure play in the Indian financial sector. IDFC brings to the table,

  • Integrated offering as a lender, advisor and investor,
  • Management – track record, defined strategy and pedigree
  • A broadening business model – trending towards more annuity and risk-linked fees,
  • Risk management systems – proven asset quality record, and
  • Capital – to leverage and invest.

Citi expects IDFC’s profits to grow at a strong 26% CAGR over FY07E-10E, backed by asset expansion and stronger asset management-driven fee income growth. ROEs, is likely to remain moderate at 14-15%, with leverage and fee incomes the driver beyond.

Citi recommends a BUY on IDFC with Rs140 target price implying a 27% expected total return from current price levels. Target price is based on a sum-of-parts methodology with the core lending business valued at 2.5x FY09E PBV or Rs113 per share. The asset management business is valued at Rs17 per share based on DCF analysis. Finally, the unrealized investment gains at Rs10 including NSE and SSKI stakes.

DalalStreet Analyst Views:
Yes, you can take exposure to this stock at Rs 110 level and blindly add more when it falls. IDFC is backed by Deepak Parekh who indirectly had told Citigroup executives to sell their stake in HDFC if they were not happy with HDFC’s performance. [The issue was just Citi wanted HDFC to be little bit more aggressive but then Deepak Parkeh may have misunderstood and reacted sharply].

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