Prospects Appear Bright - IFCI

With the markets going through uncertain times, we are recommending IFCI as our low-priced scrip. The foremost reason being the better-than-expected financial performance and the company’s improving asset quality. But the major trigger expected in the counter is the strong performance of its subsidiary companies and value unlocking in the investment book.

Further, any step towards the banking license will add to the value. On the valuation front, the scrip is placed well and its price-to-book ratio is 1.70x. IFCI is expected to put in a better financial performance as its core business seems to be back on track with a higher net interest margin (NIM) and reducing provision reversal. IFCI has earned an NIM of 1.8 per cent during the H1FY11. Based on the management presentations, the NIM is expected to improve up to 2.5 per cent by FY12. This is mainly due to the re-pricing of residual high-cost liabilities of the previous years and the lower cost of new deposits because of the improved credibility of the organisation.

Additionally, IFCI has been allocated an infrastructure company status which allows them to issue infrastructure bonds worth around Rs 500 crore with five years of lock-in. This will help the company to raise funds at lower cost. On the operational front, its NPAs seem to be a thing of the past. At present, IFCI has already provided for its non-performing loans of the past and hence each recovery from that book will directly boost the profitability. The management is confident of almost zero NPAs from their new books and expects the gross NPAs to decline significantly from 36.30 per cent in FY10 to less than around 15 per cent in FY12.

Performance of its subsidiaries would also act as a key trigger. IFCI has five subsidiaries in different segments. IFCI Infrastructure Development is into infrastructure and construction. IFCI Venture Capital Funds provides institutional support to set up ventures in the medium scale sector. IFCI Financial Services operates in stock-broking. IFCI Factors and MPCON are engaged in providing consultancy services. At present the subsidiaries are contributing 6 per cent of the total revenue which is expected to reach up to 10 per cent by FY12. Further, any separate listing of an IFCI subsidiary would create value for the shareholders.

Another element is the value unlocking of the investment book. At present, the total quoted and unquoted investment book of IFCI is around Rs 4,522 crore and it brings the per share value to Rs 61. Also, certain non-quoted investments may get listed or may be quoted in some manner which will increase the visibility of the investment book further. On the financial front, for H1FY11 it posted topline of Rs 1,110.38 crore and bottomline of Rs 320.30 crore as against Rs 729.78 crore and Rs 291.26 crore respectively. We expect the company to put in a good performance in H2FY11 also. Considering all the above factors our recommendation to investors is to buy the scrip at it current levels with a target price of Rs 84.