Multi Baggers

Investment Rationale:

India’s estimated GDP growth of 8% to 10% calls for heavy investments in infrastructure. The infrastructure lending of IDFC is slated to grow at CAGR of 38% between the periods FY05 to FY08.

Net operating income at the CAGR of 34% and EPS at the CAGR of 22.60% over the same period. With complete focus on infrastructure, IDFC is a gateway to invest in Indian infrastructure story!

IDFC is developing a unique investment bank model, which is also having a piece of lending and advisory activities. At present none of the Indian Banking or Financial companies have demonstrated such a model with a niche in the infrastructure domain. Hence, it is likely to trade at premium valuation and attract high investor interest. It acquired 33% stake in SSKI in April 2006.

IDFC is having diversified revenue sources like infrastructure lending, treasury operations, fee based advisory services. The company is targeting on improving share of non-interest revenue in the total revenue, in time to come.

Apart from the conventional earnings from its core activities, IDFC should also be valued based on its proprietary investments in quoted / unquoted equities and asset management business. The current size of both unrealized gains on investment and asset management business can add Rs 3.72 per share. This is likely to go up substantially in the future.

IDFC’s core business needs to be valued at higher PE due to the inherent growth, impeccable credit quality (Nil Net NPA since FY 04) and higher than stipulated CRAR of 25.60%.

Financials and Valuation:

At price of Rs 55, the stock trades at PER of 12.97x FY07E and at 9.82x of FY08E. The company has declared dividend of 10% for FY06. At that price dividend yield works out to be 1.82%. The company is expected to improve its dividend rate to 15% for FY07 and 20% for FY08 from 10% of FY06 resulting in dividend yield of 2.73% for FY07 and 3.64% for FY08.