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IDFC Upgraded by Morgan Stanley

October 11, 2007

India’s premier infrastructure lending company – IDFC was upgraded by Morgan Stanley research. They have set a new price target of Rs 200 on the stock. Here is Citi’s exclusive coverage on IDFC.

IDFC is entering a phase where all parts of revenue are doing well – loan growth is strong, spreads are improving and fees are very strong. For F2005-F2007, IDFC has delivered the best core earnings progression among Indian private banks and financial institutions at a 55% CAGR. This trend will continue, resulting in outperformance.

IDFC has launched the first tranche of its proposed US$2 bn project equity fund along with Citi. This will result in a doubling of assets under management in 1-2 months. Moreover, its investments in NSE is performing strongly. SSKI is two-third owned by IDFC is also performing well.

Based on earnings adjusted for recent capital issuance and new fund raising in project equity, consensus is expecting 4% YoY earnings growth in the rest of F2008. The actual numbers are likely to be higher and hence raise F2008 earnings estimates by 5%.

The stock is trading at 24.8x F2009E earnings – in line with private banks. However, private equity (PE) and proprietary investments are not contributing significantly to earnings but provide almost 30% of value. Hence, core valuations are lower at 19x (cheaper than private banks, with better earnings profile) and could rise, given strong earnings growth expectations.

In a separate development, Reliance Capital has launched an exclusive Consumer Finance Loan subsidiary.

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