IDFC's stable margin, manageable non-performing loans and improving return on equity appear to have convinced investors, with broking firm Macquarie upgrading its rating on the stock to 'outperform' and revising the target price to Rs 185 per share.
"We are increasing our 2013-14 and 2014-15 expected earnings by 4% on account of lower provisions. We are increasing our target price by 19% as we increase our sustainable return on equity to 18% from current 15% on account of better margins and lower operating expenses," Suresh Ganapathy and Parag Jariwala, analysts with Macquarie, said in their note to clients last week.
The analysts noted that despite having more refinance business and larger share of operational projects in overall portfolio, IDFC's spreads are close to the highest seen in the past seven years.
IDFC's ability to tap the bond market effectively, reduce bank funding and source funds through external commercial borrowings and FII (foreign institutional investor) debt window for infrastructure finance companies has allowed it to keep a tight leash on cost of funds.
The risks from non-performing advances also appear manageable with the company confident of keeping its bad loans at 1.5% level. The biggest risk to asset quality is from gas-based power projects that are under construction where IDFC's exposure is around 2.1%.
"We believe IDFC is a good stock to play the reform story. Even if reforms were to take a back seat, IDFC can manage the risks and profitability well and additional cushion in the form of contingent provisions does exist," Macquarie analysts said.
At 11:05 AM, IDFC share was at Rs 170 on the National Stock Exchange (NSE), down 1.9% from previous close.
