IDFC: Market says dump but analysts say buy?

The market seems to have punished public sector banks for lending to power companies that do not have the ability to repay their loans. The same is now being reflected in IDFC. The company has breached the psychological Rs 100 mark, a level last seen in May 2009.

IDFC has one of the largest exposures to the power sector as a percentage of its total assets. Against the 10 percent exposure that banks have to power/ energy companies, IDFC’s loan book exposure to the sector stands at a whopping 43 percent.

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In a research report on the company, Daiwa Capital Markets says that even in a worst-case scenario the company will keep non-performing loans at below 1 percent. This is because only 3 percent of its total loan exposure could have fuel supply issues. Most of the power projects to which the bank has lent to are expected to be commissioned in 2013-14. A couple of projects could also be under problem and need restructuring.

Incomparisonto other public sector power finance companies like REC and PFC, which have around 100 percent exposure to IPP/Transmission companies, IDFC is better placed as independent power producers (IPP) under construction account for around 7 percent of their loan book.

In terms of its valuation the stock trades at 1.2 times its adjusted book value, which is at the lower end of its valuation band. Little wonder that most analysts continue to have a buy recommendation on the company with a target of Rs 140.

However, as has always been the case, markets think otherwise.