Stock Review: India Infoline (IIFL)

Financing, investing income rose 61% in Sept quarter y-o-y

 

A DAY after India Infoline (IIFL) announced its September quarter results, the company's stock was down by 2.4% in a market that was almost flat. Investors seem to have been disappointed by the company's performance.

   On a consolidated basis, the company reported a lower net profit in the September 2010 quarter compared with the year-ago period. This was for the second straight quarter that the company's net profit has shown a decline. Net profit in the September quarter fell by 7% due to higher interest and depreciation costs and lower revenues from the broking segment.

   The broking segment, which contributed almost half of the revenues in the September quarter, fell by 11% y-o-y. This was mainly on account of a shift in demand from delivery-based products to low-margin derivative products.

   However, financing and investing income rose by 61% in September on a yearly basis. Revenues from the segment surged on the back of a high growth in the loan book.

   The loan book almost tripled in the September quarter y-o-y with mortgages forming 43% of the loan book. Since this is secured lending, it helps the company in maintaining high asset quality. Net non-performing loans were less than 1% of net advances at the end of the September quarter.

   Currently, the company is leveraged up to 0.7 times. The management has indicated that it intends to increase the gearing to 3-4 times. This might lead to a hike in interest costs. Moreover, depreciation costs, which were flat on a sequential basis, could also rise. This is because certain costs are yet to be capitalised.

   What might be good news for investors is that the relative share of revenues from the finance and investment segment might increase. This could lead to a higher top-line growth.

   The company's stock has underperformed the benchmark Sensex — it has given negative returns vis-à-vis the Sensex's 12% gain in the past one year. Going forward, a strong top line growth might help in absorbing the burden of increased costs, thereby driving profitability.