INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY LIMITED
ANNUAL REPORT 2007-2008
DIRECTOR'S REPORT
TO THE SHAREHOLDERS
Your directors have pleasure in presenting the Eleventh Annual Report together with the audited accounts for the year ended March 31, 2008.
FINANCIAL RESULTS
PARTICULARS (FIGURES IN RS. MILLION) FY 2007-08 FY 2006-07
OPERATING INCOME 25,237 15,005OTHER INCOME 117 52TOTAL INCOME 25,354 15,057LESS ADMINISTRATIVE EXPENSES* 1,133 614LESS PROVISION FOR ASSETS AND LOSSES 688 174LESS INTEREST AND OTHER CHARGES 14,802 8,554PROFIT BEFORE TAX 8,731 5,715LESS PROVISION FOR TAX ** 2,039 1,086PROFIT AFTER TAX 6,692 4,629
* Administrative expenses include staff expenses; travelling & conveyance; postage telephone & telex; establishment expenses; other expenses and depreciation
** Provision for Tax is net of Deferred Tax
INCOME FROM OPERATIONS increased by 68% from Rs.15,005 million in 200607 to Rs.25,237 million in 2007-08. IDFC's total income, increased by 68% from Rs.15,057 million in 2006-07 to Rs. 25,354 million in 2007-08.
Profit Before Tax (PBT) increased by 53% from Rs.5,715 million in 2006-07 to Rs.8,731 million in 2007-08. Profit After Tax (PAT) increased by 45% from Rs.4,62 million in 2006-07 to Rs.6,692 million in 2007-08.
IDFC's quality of assets continued to be good with 0.03% Net NPAs as on March 31, 2008.
DIVIDEND
Your Directors are pleased to recommend a dividend of 12% for the year ended March 31, 2008. OPERATIONS REVIEW
Leveraging the opportunities provided by a growing economy, the Company continues to see healthy growth in its lending activities. Gross approvals increased by 56% from Rs.130,530 million in 2006-07 to Rs.203,090 million in 2007-08, while net approvals increased by 104% from Rs.78,530 million in 2006-07 to Rs.159,900 million in 2007-08. Gross disbursements, increased by 67% from Rs.72,070 million in 2006-07 to Rs.120,060 million in 2007-08, while net disbursements increased by 85% from Rs.41,910 million in 2006-07 to Rs.77,550 million in 2007-08.
As on March 31, 2008, IDFC's total exposure to infrastructure projects was Rs.340,000 million of which Energy was the highest (36.9%), followed by Transportation (23.3%) and Telecommunication & IT (15.8%). IDFC's exposure to Commercial and Industrial sector was at 9.8%.
IDFC continued to strengthen its proprietary equity business and in 200708, net approvals were Rs.7,480 million, while net disbursements were Rs.3,080 million.
While the investment strategy for treasury operations continues to ensure adequate levels of liquidity to support core business requirements, it has started focusing on optimizing levels of return and functioning as a profit centre investing in fixed income securities, while maintaining prudent safety norms. Net interest income from treasury operations increased by 249% from Rs. 370 million in 2006-07 to Rs. 1,290 million in 2007-08.
With the acquisition of SSKI there has been a structural shift in its advisory services practice. The Company's entire suite of advisory services ranging from debt syndication, structured finance to equity and debt market services has been brought under one platform to supplement the existing stock broking and investment banking services already existing within SSKI.
The Policy Advisory Group continued to contribute to IDFC's mandate of leading private capital to infrastructure projects, by providing impetus to rationalisation of policy and regulatory frameworks.
In private equity, the Company is in the process of funding the first tranche for the landmark US $1.25 billion project equity fund being developed by IDFC along with Citigroup and IIFCL.
During the year, fee income increased substantially on account of increasing focus on asset management business and structured deals in debt syndication and private equity placement.
Detailed analysis of the performance of the Company and its businesses, including initiatives in the area of Human Resources, Information Technology and Risk Management, has been presented in the section on Management Discussion and Analysis of this Annual Report
SUBSIDIARY COMPANIES
As the Company expanded its business domain, it has also increased its subsidiary companies. IDFC has eight direct subsidiary companies - IDFC Private Equity Company Limited, IDFC Trustee Company Limited, IDFC Investment Advisors Ltd, IDFC-SSKI Securities Limited, IDFC Project Equity Company Limited, IDFC PPP Trusteeship Company Limited, IDFC Capital Company Limited and Feedback First Urban Infrastructure Development Company Limited. IDFC-SSKI Private Limited and IDFC-SSKI Stock Broking Limited are subsidiaries of IDFC-SSKI Securities Limited. Similarly, Feedback First Urban Infrastructure Development Company Limited has further floated a subsidiary called IDFC Projects Limited, which will be a stand-alone infrastructure developer.
A statement of particulars of IDFC's subsidiaries is annexed to this report.
JOINT VENTURES
IDFC has two joint ventures Infrastructure Development Corporation (Karnataka) Limited (iDeCK) in the state of Karnataka and Uttaranchal Infrastructure Development Company Limited (UDeC) in the state of Uttaranchal. These jointventure companies are engaged in advisory and project development work in the area of infrastructure at respective state level.
PARTICULARS OF EMPLOYEES
IDFC had 199 employees as on March 31, 2008. Particulars of employees as required to be furnished pursuant to Section 217(2A) of the Companies Act, 1956, read with the rules there under, forms part of this Report. However, as per the provision of Section 219(1)(b)(iv) of the Companies Act, 1956, the reports and accounts are being sent to all the shareholders of the Company excluding the statement of particulars of employees. Any shareholder interested in obtaining a copy may write to the Company Secretary of the Company.
EMPLOYEES STOCK OPTION SCHEME (ESOS)
Pursuant to the resolution passed by the members at the Extra- Ordinary General Meeting held on August 2, 2006, IDFC has introduced Employee Stock Option Scheme 2007 (referred to as 'the scheme') to enable the employees of IDFC and its subsidiaries to participate in the future growth and financial success of the Company. Out of the 7,194,683 options outstanding at the beginning of the year, 388,164 options lapsed on account of resignations and 3,016,583 options were exercised during the year.
Additionally, during 2007-08, 2,486,203 options were granted to eligible employees under the Scheme. Accordingly, 6,276,139 options remain outstanding as of March 31, 2008.
All options vest over 3 years - 30% each vest after first and second year of the grant and 40% vest after the third year. The Company has used the intrinsic value method to account for the compensation cost of option to employees of the Company. Intrinsic value is the amount by which the quoted market price of the underlying share on the date prior to the date of the grant exceeds the exercise price on the option.
Disclosures as required by Clause 12 of the SEBI Employees Stock Option SchemE and Employee Stock Purchase Scheme Guidelines, 1999 are annexed to this report.
CORPORATE GOVERNANCE
Separate detailed chapters on Corporate Governance, Additional Shareholder Information and Management Discussion and Analysis are attached herewith and forms part of this annual report.
PUBLIC DEPOSITS
During 2007-08, your Company has not accepted any deposits from the public within the meaning of the provisions of the Non-Banking Financial Companies (Reserve Bank) Directions, 1998.
FOREIGN EXCHANGE
The particulars regarding foreign exchange expenditure and earnings are furnished at Item No. 15 & 16 in the Notes to the Accounts. Since the Compam does not own any manufacturing facility, the other particulars in the Companies (Disclosure of Particulars in the Report of the Board of Directors) Rules, 1998 are not applicable.
RAISING OF FUNDS
The Company raied Rs. 21,000 million byway of QIP during the year. The funds have been used for the purpose of genera business of the Company. The Company is also seeking an enabling resolution to raise US$ 750 million over next 12 - 18 months.
DIRECTORS
The Board, at its meeting held on July 25, 2007, appointed Mr. Abdul Rahim Abu Bakar as Director with effect from July 25, 2007 and he holds office up to the date of the ensuing Annual General Meeting (AGM).
Mr. Mohan Rajasooria, Alternate Director for Mr. Abdul Rahim Abu Bakar, resigned with effect from November 23, 2007. The Board wishes to place on record its sincere appreciation of his valuable contribution to the Company.
Mr. Vinod Rai, Secretary (Financial Services), Ministry of Finance, Government of India, ceased to be Director with effect from January 3, 2008. The Board wishes to place on record its sincere appreciation of his valuable contribution to the Company.
The Board, at its meeting held on February 19, 2008, appointed Mr. Arun Ramanathan, Secretary (Financial Sevices), Ministry of Finance, Government of India, as Director with effect from February 19, 2008 and he holds office up to the date of the ensuing Annual General Meeting.
In accordance with the Articles of Association of the Company and provisions of the Companies Act, 1956, Mr. Dimitris Tsitsiragos, Dr. Omkar Goswami and Mr. Shardul Shroff retire by rotation and being eligible, offer themselves for re-appointment at the ensuing AGM.
INTERNAL CONTROL SYSTEMS
The Company has in place adequate systems of Internal Control to ensure compliance with policies and procedures. Internal Audits of all the units of the Company are regularly carried out to review the internal control systems. The Internal Audit Reports along with implementation and recommendations contained therein are constantly reviewed by the Audit Committee of the Board.
AUDITORS
Messrs. Deloitte Haskins and Sells, Chartered Acountants, will retire as the statutory auditors of the Company at the ensuing AGM. The Board, at its meeting held on April 28, 2008, has proposed their re-appointment as Auditors to audit the accounts of the Company for the financial year ending March 31, 2009.
Messrs. Deloitte Haskins and Sells, the retiring auditors, have confirmed that their re-appointment, if made, would be in conformity with the provisions of Sections 224 and 226 of the Companies Act, 1956, as also indicated their willingness to be re-appointed.
DIRECTORS' RESPONSIBILITY STATEMENT
The Directors confirm that:
- in the preparation of the annual accounts, the applicable accounting standards have been followed;
- they have selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent, so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profits of the Company for the year;
- they have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956, for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; and
- they have prepared the annual accounts on a going concern basis.
ACKNOWLEDGEMENTS
IDFC has developed close relationships with the Ministry of Finance (MoF), Financial Services Division (MoF), Ministry of Surface Transport, National Highways Authority of India, Ministry of Power, Department of Telecommunications, Ministry of Petroleum and other Ministries of the Government of India involved with infrastructure development; the Reserve Bank of India and regulatory bodies, TRAI, the Central Electricity Regulatory Commission and State Electricity Regulatory Commission; the Planning Commission; ITT (Kanpur); IIM (Ahmedabad); the State Governments and all IDFC's Shareholders. The Board of Directors wishes to gratefully acknowledge the assistance and guidance received from all of them. IDFC could make the progress it has in these years due to the dedication and creativity of its staff at all levels. The Board of Directors wishes to place on record its warm appreciation for these efforts.
For and on behalf of the Board
DEEPAK S. PAREKH Chairman Mumbai,June 7, 2008
ANNEXURE
PARTICULARS OF DISCLOSURE AS REQUIRED UNDER SEBI (EMPLOYEE STOCK OPTION SCHEME AND EMPLOYEE STOCK PURCHASE SCHEME) GUIDELINES, 1999
PARTICULARS 2007-2008
1. Options outstanding as at the beginning of the year 7,194,683
2. Options granted during the year 2,486,203
Options maybe granted at a price not less 3. Pricing Formula than the face value per share. Options have been granted at Rs.17.48 and at Rs.146.06.
4. Options Vested* 3,016,683
5. Options Exercised* 3,016,683
6. Total no. of shares arising as result of exercise of Options 3,016,683
7. Options lapsed** 388,164
8. Variation in terms of Options None
9. Money realised by exerise of options (Rs. in million) 52.73
10. Total number of options in force* 6,276,139
* The number of options have been reported as on 31.03.2008
** Lapsed Options includes options cancelled/lapsed.
11. Employeewise details of options granted to:
- Senior Management 150,000
- any other employee who receives a grant in any one year of option amounting to 5% or more of option granted during that year None
- employees who were granted options, during any one year, equal to or exceeding 1% of the lone issued capital (excluding warrants and conversions)) of the Company at the time of grant None
12. Diluted Earnings Per Share pursuant to issue of shares on exercise of option calculated in 5.34accordance with AS 2. Earnings Per Share (Rs.)
13. Pro Forma Adjusted Net Income and Earnings Per Share
PARTICULARS RUPEES (IN MILLION)
Net IncomeReported 6,691.74Add: Intrinsic Value Compensation Cost 29.42Less: Fair Value Compensation Cost 32.16Adjusted Pro Forma Net Income 6,689.00Earning Per Share: BasicAs Reported (Rs.) 5.36Adjusted Pro Forma (Rs.) 5.36Earring per Share DilutedAs Reported (Rs.)) 5.34Adjusted Pro Forma (Rs.) 5.34
14. Weighted average exercise price of Options granted during the year whose:
(a) Exercise price equals market price NA(b) Exercise price is greater than market price NA(c) Exercise price is less than market price 117.81
15. Weighted average fair value of Options granted during the year whose:
(a) Exercise price equals market price NA(b) Exercise price is greater than market price NA(c) Exercise price is less than market price 95.96
ANNEXURE
PARTICULARS OF DISCLOSURE AS REQUIRED UNDER SEBI (EMPLOYEE STOCK OPTION SCHEME AND EMPLOYEE STOCK PURCHASE SCHEME) GUIDELINES, 1999 (continued):
PARTICULARS 2007-2008
The fair value of the options granted has been estimated using the Black-Scholes option pricing Model. Each tranche of16. Description of method and vesting have been considered as a significant assumptions used to separate grant for the purpose of estimate the fair value of options valuation. The assumptions used in the estimation of the same has been detailed below:
VARIABLES Weighted average values for all grants made during the year Stock Price (Rs.) 176.72Volatility 47.02%Risk free Rate 7.51%Exercise Price (Rs.) 117.81Time To Maturity 3.60Dividend yield 1.42%Weighted Average Value (Rs.) 96.06
Stock Price: Closing price on NSE as on the date of grant has been considered for valuing the grants.
Volatility: There is no adequate price history for the shares since the Listing of the shares of the Company on a recognized stock exchange. We have not adopted the volatility of a peer group company as recommended by the guidelines as there are no such peer group companies. For the options granted after the listing of the shares the historical volatility till the date of grant has been considered to calculate the fair value.
Risk-free rate of return: The risk-free interest rate being considered for the calculation is the interest rate applicable for a maturity equal to the expected life of the options based on the zero-coupon yield curve for Government Securities.
Exercise Price: Options have been granted at a price of Rs. 17.48 arrived by the independent valuer pre-listing except for one grant where the price is Rs. 146.06
Time to Maturity: Time to Maturity / Expected Life of options is the period for which the Company expects the options to be live. The minimum life of a stock option is the minimum period before which the options cannot be exercised and the maximum life is the period after which the options cannot be exercised.
Expected divided yield: Expected dividend yield has been calculated as an average of dividend yields for the two financial years preceding the date of the grant. MANAGEMENT DISCUSSION AND ANALYSIS
Infrastructure Development Finance Company Limited (IDFC' or the Company') finances the infrastructure needs of India. Its success over the last few years - especially as a listed entity after its initial public offering in July 2005 - has been due to the combination of many factors. The key ones are: the sheer demand for infrastructure in the country, IDFC's acknowledged expertise in all areas of infrastructure, the Company's ability to tap global as well as Indian financial resources, its strategy to be a one-stop shop' for infrastructure and a strong synergy between the Company's professional Management and its Board of Directors and key shareholders that allows it to expeditiously pursue opportunities for yet more profitable growth.
IDFC HAS SEEN ACCELERATED GROWTH
in 2007-08 both in revenues and profits. The size of the Company's consolidated balance sheet increased by 57% - from Rs.183,840 million in 2006-07 to Rs.289,400 million in 2007-08. This quantum jump brings with it economies of scale and an increase in scope of opportunities. It transforms IDFC's positioning from being a niche player to a powerhouse among Indian financial intermediaries.
Not only does the Company now have a large asset base but it is also of very good quality. IDFC has 0.03% net Non-Performing Assets (NPAs) and only 0.17% gross NPAs.
THE SCENARIO: GLOBAL AND INDIAN
IDFC's growth in business and profits is even more credible given the bearish scenario in global as well as Indian markets in the second half of 2007-08.
THE GLOBAL SITUATION AND OUTLOOK The US It is best to begin with the US. For a nation whose people save little or nothing, a very large part of consumer spending in the US has been predicated upon home equity values. Since the mid-1980s, the US consumers have relied more and more on drawing credit lines based on the value of their housing assets to meet consumption and other needs. This home equity-based consumption growth started being threatened by the state of the housing market, which began to go downhill since December 2006. According to the S&P Case-Shiller housing prices index, there has been a sharp drop in the housing price inflation rate: from 15.4% in November 2004 to (-)14% in March 2008. As yet, there is no sign of an upturn.
This fall in home prices has significantly increased debt defaults - especially for borrowers who took the 2/28' mortgage loans, which carried a low fixed rate for the first two years, and floating rates for the next 28. With resets to floating rates taking place, many have failed to pay their loan obligations. This is not limited to the sub-prime borrowers but has spread in varying measures to other categories as well. Up to July 2005, the long-term average monthly foreclosures was around 79,000. That number has gone up to 234,685 in March 2008-indicating a 57% growth in foreclosures in a year. It is estimated that 2008 and 2009 together will see an extra two million home loan foreclosures.
Fall in home equity and foreclosures have severely dampened consumer sentiments in the US. As if these were not enough, gasoline prices have sky-rocketed and, in effect, have imposed a tax equivalent to 2% of US household disposable income. From a peak growth rate of 5.2% in June 2007 (over June 2006), non-gasoline retail sales growth in the US was down to 0.6% in March 2008. Consequently, in January March 2008, de-seasonalised growth in personal consumption expenditure fell to 1 % over the previous quarter-the lowest growth of real personal consumption expenditure in the last 27 quarters.
That US GDP growth in Q1 2008 was not negative is just a mirage. The 0.6% sequential growth of GDP in Q1 2008 was entirely due to an unnatural rise in inventories in January-March 2008. Net of the sharp spike in inventories, US growth had already moved into negative territory. And almost every economist predicts a full blown recession in Q2 2008.
It is difficult to predict how long the US recession will last. For one, housing prices are not expected to come back to an even keel (out of negative to zero inflation) until October-December 2008, if not a quarter later. For another, if crude oil prices continue remaining in triple digits, there is little to expect in terms of a consumer demand recovery over the next few quarters.
To be sure, there are some positives in the horizon. The US Federal Reserve has moved with exceptional agility, foresight and decisiveness. Today, 3-month US interest rates are down to 1.91 % and the yield on 10-year treasury bills is ruling at 3.86% - among the lowest in the developed world. The Fed's decisive action in facilitating J.P. Morgan's bail-out of Bear Stearns has also instilled much needed confidence in a shattered financial system and the steadily depreciating dollar has boosted US exports and finally begun to reduce the country's massive current account deficit.
However, there is still a great deal of pain left in the US economy and its financial markets. If UBS's, Citigroup's and Merrill Lynch's Q1 2008 losses are a harbinger of things to come, then write-downs from the sub-prime crisis are expected to continue. In fact, the IMF has estimated losses from the US financial crisis at a staggering US $945 billion.
The UK and the Euro zone
The UK, too, is in trouble. Also beset by housing sector worries and poor retail spending, GDP growth from the UK is expected to reduce to somewhere between 1.5% and 1.8% in 2008. In fact, the normally laissez faire Bank of England offered to swap government bonds for mortgage securities to kickstart bank lending; and in April 2008, it cut the benchmark interest rate by 25 basis points to 5%- its second rate cut since December 2007.
The Euro zone is also in a worse shape than before. With a slowdown in growth and a rise in consumer price inflation, the European Central Bank (ECB) is caught in a bind. As of now, it has maintained its anti-inflationary stance by remaining firm with its interest rate. That has kept the euro at uncompetitive levels vis-a-vis most currencies, especially in relation with the US dollar. But with the spectre of lower growth in France, Italy and Germany, and the possibility of a serious real estate sector-driven financial crisis in Spain, it may be a matter of time before the ECB has to jump into the fray. The Euro zone is expected to witness at least a 1 percentage point decline in GDP growth compared to 2007 -achieving 1.5% to 1.7% growth in 2008.
All this bodes ill for the supply of global capital. Banks, private equity and hedge funds, and other suppliers of capital have suffered throughout 2007, and have significantly lower risk appetite compared to a couple of years ago. This has increased the cost of global capital, either as debt or equity. Moreover, the recent depreciation of the rupee vis-avis the US dollar and the euro - down by 7.6% versus the dollar between January and mid-May 2008, and 12.1 % versus the euro - has increased the effective cost of international borrowings. In addition, restrictions by the Reserve Bank of India (RBI) on external commercial borrowings has almost blocked off the possibility of taking on greater foreign debt.
India
India's GDP growth is also slowing down - but not like the US, the Euro zone or the UK. After two consecutive years of 9% and 9.7% growth, it looks as if GDP growth for 2007-08 will be marginally lower at 8.7%. That is not a cause of concern. What is, however, worth noting is that GDP growth for 2008-09 will be lower still. The estimates vary between 7.5% and 8% - less than before, but still making India the second fastest growing large economy, after China.
While 7.5% growth will still be creditable, especially in an overall bearish milieu, there are concerns about growth in infrastructure spending. This is showing up in the slowing down of construction activity. Until July-September 2007, the construction sector achieved at least 10% annualised growth for 18 straight quarters. In October-December 2007, it grew by 8.4% -which is significantly less than its average performance over the last four years.
In fact, despite impressive GDP growth right up to 2007-08, the pace of infrastructure development in India remains a matter of concern. Chart B shows that, in the last three years, growth in infrastructure, as measured by the Indian infrastructure index, has lagged behind GDP growth. In 2007-08, the difference has been particularly sharp. A key economic and governance issue is how India can raise this growth to equal, if not exceed, GDP growth-without which it will be difficult to raise India's growth rate on a sustainable basis. It is a matter of concern for all policy-makers and players in the infrastructure space, including IDFC.
OUR BUSINESS STRATEGY
Each sizeable infrastructure project can be divided into different elements that are distributed across different timelines, with each having its own risk and return profile. Diverse risk-return profiles have varying implications for providers of capital, be it equity or debt. Thus, a single infrastructure project can be disaggregated to provide value propositions for different players across the project lifecycle. IDFC's core competitive edge lies in its ability to comprehend the different incentives and successfully create disaggregated, yet interconnected, packages that meet each of the many objectives, and provide win-win solutions for the client and the Company.
In line with its strategy outlined over the last two years' annual reports, IDFC continued to focus on enhancing its services as a 'one-stop shop' for financial intermediation into the infrastructure sector. The objective is to become India's specialist infrastructure bank, spanning the entire value chain. In doing so, IDFC focuses on working with sponsors right from inception to fruition of infrastructure projects. This requires the Company to offer a suite of services and products that not only captures the entire mind-space of sponsors so that whenever they think of infrastructure, they think of IDFC, but one that makes financial and long term strategic sense for the Company.
Thus, in addition to IDFC's loans, there has been a concerted effort at developing businesses that generate non-interest income from fees and capital gains from investments. These businesses are important on at least two counts. They provide critical support to customers in executing infrastructure projects, by sharing risks and realising gains along with the sponsors. Moreover, they provide a more profitable income source in the long run.
TABLE 1 RETURN ON ASSETS TREE % OF AVERAGE TOTAL ASSETS
PARTICULARS 2007-08 2006-07
INFRASTRUCTURE 2.4% 2.6%TREASURY 0.5% 0.2%NET INTEREST INCOME 2.9% 2.8%PRINCIPAL INVESTMENTS 0.9% 0.9%ASSET MANAGEMENT 0.2% 0.4%IDFC-SSKI 0.8% 0.0%ADVISORY AND OTHER FEES 0.7% 0.5%NON-INTEREST INCOME 2.0% 1.8%OTHER INCOME 0.1% 0.1%TOTAL 5.6% 4.7%
After two years of trial, 2007-08 saw major traction in this area, with a significant growth in the Company's non-fund based businesses. Non-interest income (i.e. income from principal investments, asset management, investment banking, and other fees) grew by 131% in 2007-08. This is no longer high growth over a low base. The share of non-interest income in IDFC's total operating income has increased from 37% in 2006-07 to 47% in 2007-08. Today, these non-interest incomes have attained critical mass in IDFC's portfolio.
To streamline and increase the Company's offerings in non-balance sheet intensive businesses, IDFC made two major strategic acquisitions in 2007-08. These were in SSKI Securities and the Standard Chartered Mutual Fund, India.
It may be recalled that in September 2006, IDFC had acquired 33.33% stake in SSKI Securities. In the middle of 2007, it further increased the stake to 66.66% by buying out the shares held by the founder and, in March 2008, the stakes were increased to 79.80%.
With its leadership position in investment banking in the infrastructure space and a strong institutional brokerage and research platform, SSKI forms a perfect fit for IDFC. With its 80% stake in SSKI, IDFC has now re-organised its corporate finance and advisory business including debt syndication, structured finance and corporate debt and equity market advisory under the IDFCSSKI business platform. In addition, the acquisition has allowed IDFC to enter the institutional equities business, a strong base from which to expand the Company's franchise in the wider investment banking landscape.
In March 2008, Standard Chartered Bank agreed to sell to IDFC, the Standard Chartered Trustee Company Private Limited and the Standard Chartered Asset Management Company, which handles its mutual fund business in India. The acquisition was carried out for a total cash consideration of approximately US$205 million, before deductions for local taxes and deal expenses. This investment is in line with the Company's strategy of broadening its footprint in the asset management business.
This platform will give IDFC entry into the mutual fund space and thereby allow it to scale up fee generating assets under management and regulations permitting to also tap new pools of funding for listed infrastructure companies.
As a financial intermediary, it is important to track the Return On Assets (ROA) generated by the Company. Table 1 shows that with the accelerated growth in noninterest income, IDFC's ROA (net operating income as a ratio of average assets) increased from 4.7% in 2006-07 to 5.6% in 2007-08. While the ROA from net interest income remained stable at around 2.9%, there has been an increase in the ROA from non-interest incomes from 1.8% in 2006-07 to 2.6% in 2007-08.
In July 2007, the Company raised $ 519 million in a QIP. Consequently, the leverage ratio has decreased from 5.1 in 2006-07 to 4.0 in 2007-08. The lower leverage ratio is a temporary phenomenon that gives the Company some running room to continue to expand its balance sheet while maintaining its AAA status with the rating agencies.
OUR BUSINESSES
Today, the Company has a balanced business model, akin to a four-wheel driven car, that can navigate a client through, or direct capital and services to, any part of the entire infrastructure value chain, from the pre-development stage of a project to the construction, operations, refinancing and exit stages of the investment life cycle. The four wheels of the car are the following four business verticals that together give the Company a scalable and diversified revenue stream:
- Project Finance
- Principal Investments and Treasury
- Investment Banking
- Asset Management
IDFC'S FOUR WHEEL DRIVE MODEL can be bifurcated into the front two wheels comprising the capital intensive balance sheet business including the loan book, which give modest returns but provide and scale client reach; and the principal investment and treasury business, which can generate superior ROES but with less predictable revenue streams.
The rear two wheels comprise the Company's capital light businesses investment banking, which has high but volatile returns, and asset management (including private equity, project equity, fund of funds, public market alternatives and mutual fund), which not only has high returns, but can also deliver scalable and more predictable revenue streams.
In addition, the Company also has an advisory group that works closely with the Government of India and various state governments on policy issues and in creating capacities to develop commercial infrastructure and public-private partnerships.
PROJECT FINANCE
IDFC's primary business activity remains providing debt financing for infrastructure projects, and the assets thus created continue to be the largest portion of the Company's asset book. Given the nature and scope of different infrastructure projects, some project finance activities also translate into placement of equity and mezzanine debt products. Project finance also provides IDFC many opportunities to generate fee income from related advisory services. Highlights of project finance for 2007-08 are given below.
The Company provides debt and equity finance primarily to four infrastructure sectors: Energy, Transportation, Telecom & IT, and Commercial & Industrial. IDFC's total exposure to these sectors increased by 54.2% from Rs.220,400 million in 2006-07 to Rs.340,000 million in 2007-08.
As Chart C shows, Energy still comprises the largest exposure, followed by transportation, then Telecom & IT, and finally Commercial and Industrial. There has also been a sizeable increase in share of Others' in 2007-08. This has come about mainly from IDFC's foray into cement and steel which, in its first year, accounted for 2.6% of the Company's total exposure.
Given IDFC's objective to provide equity as well as debt finance, it is not surprising that the share of loans in total exposure reduced from 89.5% in 2006-07 to 86.5% in 2007-08. Even so, loans still constitute over 85 % of the Company's business.
Of the 86.5% share of loans, 52.5% was on account of specific project loans, 26.4% was in the form of corporate loans and 7.6% was loan against shares.
- As on March 31, 2008, IDFC's infra loans increased by 42.4% to Rs.201,533 millionversus Rs.141,503 million a year earlier
- Gross approvals, including equity and non-funded assistance, increased by 56% to Rs.203,090 million in 2007-08, while net approvals grew by 104% to Rs.159,900 million
- Gross disbursements, including equity, increased by 67% to Rs.120,060 million in 2007-08, while net disbursements grew by 85% to Rs.77,550 million
Energy
With rapid economic growth, India continues to witness major power supply problems. Hence, there has been, and will continue to be, a significant ramp up in investments in power in terms of generation, transmission and distribution of power. In addition, unbundling and provision of open access provides a further growth stimulus to this sector. Given below is the Company's performance in the energy sector in 2007-08.
- As on March 31, 2008, IDFC's total exposure in the energy sector was Rs.125,320 million
- Gross approvals including equity and non-funded assistance increased by 22% to Rs.60,640 million in 2007-08; and net approvals grew by 92% to Rs.51,280 million
- Gross disbursements, however, fell by 16% to Rs.24,610 million; net disbursements, too, declined by 41 % to Rs.13,550 million in 2007-08
While there was a fall in disbursement to this sector in 2007-08, most of it is a timing issue. With significant growth in net exposure, there is large business awaiting to be translated to actual disbursements. Chart D plots the data of IDFC's steady growth in energy over the last five years.
IDFC continues to focus on projects that have appropriate risk return profiles in power generation. The Company is focusing on a strategy of developing strong partnerships with different players in the sector, some of whom are also first time participants. The partnering process often extends to arranging equity for the sponsors. While most of the stress is on thermal generation, IDFC is also aggressively pursuing hydro-electric projects in the small and medium scale. Identifying the immense potential in renewable power like wind or solar, IDFC has actively partnered players in the wind energy space. This includes equipment manufacturers and wind farm developers.
Transportation
This sector encompasses the development of roads, civil aviation, airports, ports, container terminals, and gas and oil pipelines. Highlights of IDFC's performance in 2007-08 are:
- As on March 31, 2008, IDFC's total exposure in transportation was Rs.79,150 million
- Gross approvals, including equity and non-funded assistance increased by 121 to reach Rs.47,830 million in 2007-08 and net approvals increased by 115% to Rs.33,500 million
- Gross disbursements grew by 70% to Rs.27,660 million in 2007-08, while net disbursements increased by 35% to Rs.14,060 million
Chart E shows IDFC's gross approvals and disbursements in the transportation sector over the last five years. After the slowdown in 2006-07, gross approvals and disbursements have regained their growth trend in 2007-08.
There have been some significant publicprivate partnership models in the roads sector, with several successes in toll-based road financing. Although these projects have lower margins, there is immense opportunity in this sector and IDFC continues to aggressively partner sponsors in roads, with an emphasis on National Highway Authority of India (NHAI) projects and state level highways.
IDFC has played a lead role in privatisation of airports and continues to leverage opportunities to finance and advise on such projects. The Company has also extended its play in aviation by funding aircraft acquisitions and helping in the consolidation of airlines. Going forward, IDFC expects increased activity on the logistics front, especially with selective opening up of railways and container traffic, and the development of urban mass transportation systems.
Telecom & IT
Telecom & IT today has become a mature business in India. Significant growth has coincided with the consolidation of the industry by a few very large enterprises, each having major internal funding capacity. IDFC, therefore, has re-calibrated its business strategy in the Telecom and IT space, and is now focusing on specific niche areas. Highlights of the Company's performance in 2007-08 are:
- As on March 31, 2008, IDFC's total exposure in Telecom & IT was Rs.53,560 million
- Gross approvals grew by 3% to Rs.33,310 million in 2007-08; net approvals increased by 6% to Rs.26,350 million
- Gross disbursements increased significantly in 2007-08 - rising by almost 210% to Rs.36,670 million. Net disbursements also grew to Rs.25,770 million
Chart F shows IDFC's gross approvals and disbursements in the Telecom & IT sector over the last five years. In 2006-07, there was a massive gap between approvals and disbursements-because majority of the approvals of that year translated into disbursements in 2007-08. The sector is witnessing some new sources of increased demand. This is seen by the fact that even in 2007-08, the Company has managed to grow approvals in this sector, which were already at a very high level in 2006-07.
2007-08 saw new licenses being provided to different players, many of whom are new to the business of telecom. The Company aggressively leveraged this opportunity of partnering new entrants; and much of the jump in exposure in telecom comes from a few large deals.
IDFC continues to finance some of the smaller players, and explore opportunities for funding mergers, acquisitions and consolidation. With severe competition, there is pressure on costs in the industry, which calls for players looking at opportunities to share infrastructure facilities. IDFC believes that this is opening up several opportunities in the telecom infrastructure space, especially in telecom towers. In addition, the Company continues to work with IT-enabled service providers who primarily support telecom companies.
Commercial and Industrial Infrastructure
The commercial and industrial sector primarily includes IT Parks, SEZs, commercial property and hotels. Thanks to the construction and real estate boom over the last few years, this sector has attracted considerable attention and investments. Thus, within a short span of time, it now accounts for over 9.8% of IDFC's exposure. Highlights for 2007-08 are:
- As on March 31, 2008, IDFC's total exposure in commercial and industrial infrastructure was Rs.33,340 million
- Net approvals increased by 168% to Rs.19,480 million in 2007-08
- Net disbursements increased by 34% to Rs.15,300 million in 2007-08
With RBI placing restrictions on banks in financing several areas in this sector, there is an increased opportunity for a NonBanking Financial Companies (NBFC) like IDFC. However, while opportunities are abundant, the Company remains cautious with its activities in this space. IDFC believes that availability of commercial space is starting to outstrip demand and that there will be pressure on rentals and sale prices. Therefore, it invests in commercial development only if it believes that the underlying land price is justifiable and the promoter offers significant collateral. Moreover, with a spurt in hotel development over the last couple of years, hotel room availability will increase and, thus, bring down hotel tariffs. The Company's approach here is to be very selective and focus to the extent possible, on the budget segment in hotels, which is expected to witness lower volatility in room rates.
In addition to these sectors, the Company has also extended its foray [into tourism] and entered into financing of greenfield and expansion projects in steel and cement.
Tourism
- In 2007-08, IDFC's exposure in tourism was Rs.21,020 million, or 6.2% of the total
- Net approvals increased 3.8 times to Rs.9,880 million in 2007-08
- Net disbursements increased by 54% to Rs.2,390 million in 2007-08
Steel and Cement
- IDFC's exposure in 2007-08 was Rs.8,980 million, or 2.6% of the total
- Net approvals were Rs.9,020 million
- Net disbursements were Rs.2,100 million
PRINCIPAL INVESTMENT & TREASURY
IDFC's principal investments include direct investments from the Company's own balance sheet. These are typically of four types:
- INFRASTRUCTURE INVESTMENTS,
where the Company supplements its lending activities by taking direct equity stakes in projects or infrastructure companies. These are generally to build longer term relationships with sponsors, and to support them by offering innovative financing tools and sharing risks. Here, the Company expects to benefit from share value appreciation and have a clear exit route at the appropriate time. In addition, IDFC has seeded IDFC Projects Limited, a subsidiary company that will focus on developing a targeted portfolio of infrastructure assets
- FINANCIAL INVESTMENTS, comprise investments in the financial services space including investments in NSE, STCI and ARCIL to generate returns
- INVESTMENT IN VENTURE CAPITAL UNITS, for third party funds which are sponsored and managed by IDFC
IDFC's principal investments business saw significant growth in 2007-08. This business will be managed to within clearly defined parameters and prudential limits relative to the size of the Company's capital base and balance sheet.
- In 2007-08, IDFC's equity asset book grew 2.3 times to Rs.13,500 million. Of this, Rs.3,790 million was financial equity, while Rs.8,520 million was infrastructure equity and Rs.1,180 million was in the form of venture capital units
- Income from the Company's principal investments, which includes dividends and capital gains, increased by 62% from Rs.1,330 million in 2006-07 to Rs.2,160 million in 2007-08
- STRATEGIC INVESTMENTS, where IDFC picks up stakes in entities to further strengthen its business offering or for strategic purpose that is central to the Company's long term business objectives, are treated separately. Investments in SSKI and Standard Chartered Mutual Funds were the key such examples in 2007-08
Treasury
Traditionally, the treasury function has been one of liquidity management for the project finance and principal investing business, with the focus on raising adequate funds at optimal costs to the business. Over the years, IDFC has acquired experience and knowledge in this function, and is now leveraging this skillset to convert the treasury function into a profit centre that focuses on fixed income investments. Investment activities are undertaken within the purview of strict and well defined prudential risk-return norms. While profit is now an objective, the core function still remains efficient liquidity management. Consequently, the Company now has a liquidity book that parks funds for providing liquidity for lending activities and a proprietary book that has the fixed income security investments with profits as a key driver.
- Average treasury assets increased by 105% from Rs.22,771 million in 2006-07 to Rs.46,621 million in 2007-08
- Net interest income from treasury operations increased 3.5 times from Rs.370 million in 2006-07 to Rs.1,290 million in 2007-08
INVESTMENT BANKING: IDFC-SSKI
IDFC-SSKI is the platform on which the Company is developing its investment banking and institutional broking business. SSKI has brought with it a powerful research-based equity franchise, strong institutional relationships across the globe and a recognised infrastructure footprint.
While SSKI always had a strong equities business, after IDFC's acquisition, this entity is emerging as a full service investment bank across debt and equity.
As of March 31, 2008, the total employee strength of IDFC-SSKI was 144. Much of the year has been spent in the postacquisition integration process. Even so, the entity continued with its business and was particularly active in the IPO and QIP advisory space. During 2007-08 IDFC-SSKI contributed Rs.1,963 million to the gross income of IDFC.
ASSET MANAGEMENT
Asset management is one of the critical businesses that will drive the Company's long term growth. IDFC leverages its specialised skill-sets and reputation as a leading investor in the infrastructure space to mobilise global and domestic funds and invest these as equity and debt in infrastructure projects, as well as listed and unlisted Indian companies.
The Company benefits in a variety of ways. First, as the quantum of third party assets increase in volume, IDFC generates a steadier stream of incomes in terms of fees. It also receives a share of the gains from their investments as carry profits. Second, given the risk profile of infrastructure projects, often there is need for equity investments. These assets, under IDFC's management, become an important source of providing such equity and increasing the Company's service offerings. Third, IDFC also invests in the various funds under its umbrella and benefits from the successes of these funds. Fourth, there could be coinvestment opportunities where IDFC's balance sheet could come into play.
Broadly speaking, IDFC, today, has four groups of such assets under its management: private equity, project equity, public market alternatives and mutual funds. In addition, IDFC is launching a private equity fund of funds.
Private Equity
IDFC's private equity business focuses on generating attractive returns for investors by providing equity-based risk capital to early stage and rapidly growing infrastructure focused companies. This business is undertaken through its wholly-owned subsidiary, IDFC Private Equity Company Limited (IDFC Private Equity'). IDFC Private Equity acts as investment manager for funds dedicated to investments in the private equity asset class.
Its first fund, India Development Fund, had a corpus of US $190 million and was the first to raise capital entirely from domestic institutional investors. The first fund has been fully invested and has exited four investments - two of which are partial exits. Through these four exits, the fund has already returned the original corpus of US$ 190 million to its investors.
The second fund, IDFC Private Equity Fund II, raised US $440 million, of which over 70% came from overseas investors. This fund is fully committed and is expected to be fully invested by the first quarter of 2008-09.
During 2007-08, IDFC Private Equity started raising its third fund, IDFC Private Equity Fund III and achieved a soft close of US$ 700 million.
As of March 31, 2008, total assets under IDFC Private Equity's management were around US$ 630 million. With the third fund coming on-stream, the value of assets under management will increase to around US $1.3 billion.
Project Equity
IDFC Project Equity is the manager of third party funds that invest equity in infrastructure projects in core sectors like energy and utilities, transportation & telecommunications to provide its investors with long term stable inflation hedged returns. This will be achieved by investing largely in post-construction phase projects or projects where there is sufficient visibility with respect to their cash flows. These investments typically have a lower risk-return profiles compared to the pure private equity play.
IDFC Project Equity, the manager of the India Infrastructure Fund ('IIF') along with the Citigroup, is raising a fund for investments as project equity. IDFC and Citi have each invested US$ 100 million in this fund. As of March 31, 2008, the HE had achieved a soft first close of US $ 522.5 million.
During 2007-08, IDFC, as a consolidated entity, generated asset management fees worth Rs.492 million. This will significantly increase as the quantum of funds rise overtime.
IDFC Global Alternatives
IDFC Global Alternatives (IDFC-GA), based in Singapore, is a global emerging markets private equity fund-of-funds business. IDFC-GA will focus mainly on Asia and the Commonwealth of Independent States (CIS), with a smaller allocation to other emerging markets. It will focus its manager selection on those that provide expansion and buyout capital to middle market companies. It will commit to both established and first generation managers as well as consider making allocations to managers investing in frontier markets in Asia and CIS.
Standard Chartered Mutual Fund, India
IDFC acquired this business in March 2008.This transaction was subject to certain regulatory approvals and is now completed. As of now, IDFC has not internalised the operations of this business with its own operations. As of March 31, 2008, assets under management of this business were Rs.127,335 million.
The Company brings with it seven years of experience, suite of high quality funds with an established track record and staff strength of 65 professionals with deep domain knowledge. While 60% of asset under management are from institutional investors, the rest comes from retail investors. This business should provide a good platform for IDFC to promote its AMC business.
OUR PEOPLE
IDFC prides itself on having one of the best talent pools in India that specialises in the infrastructure finance domain. In addition to regular implementation of Company's objectives, many of them also provide thought leadership to the industry in their specific area of expertise.
In 2007-08, the Company added 131 new employees across the domains of project finance, private equity, investment banking and asset management. These employees bring with them expertise to consolidate and sustain the IDFC's business growth. During the year, the campus recruitment program was redesigned, based on the feedback from earlier batches. There are sixteen fresh MBAs from the top business schools in the country participating in the Company's analyst program involving exposure to various verticals.
As an addition to the variable compensation system, the Company has employee stock options to high performers with an objective to create a core long-term talent group within the IDFC group. This also ensures that performing employees see long term benefit in participating in the growth of the organization. A Hewitt study for fixed compensation benchmarking has been concluded and appropriate changes to salary structures were done.
To nurture key talent at senior levels, IDFC has approached Oxford University's Said Business School to design, develop and deliver a programme for its senior executives. The core objective of the programme is to create a platform for dialogue between senior executives from IDFC and leading thinkers and executive education specialists. The programme called Leadership Excellence in 21st Century' comprises 6 modules and an inter-module project on a leading organizational dilemma. IDFC has also tied up with ISB, Hyderabad, to run training diagnostics and devise programs in areas like leadership, knowledge and managerial excellence. This program addresses talent across levels and functions and covers the whole length and breadth of the organization.
The other important focus area for human resource management at IDFC was the integration of the investment banking arm. This integration process has been completed successfully. IDFC, alongwith IDFC-SSKI had 367 employees as on March 31, 2008.
TABLE 2 ABRIDGED CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR IDFC:
Rs. MILLION 2007-08 2006-07
OPERATING & OTHER INCOME 13,236 7,158OF WHICHNET INFRASTRUCTURE BASED INTEREST 5,650 3,920NON-INTEREST INCOME 6,180 2,670NET TREASURY & OTHER INCOME 1,406 568OPERATING EXPENSES 2,532 821OF WHICHSTAFF EXPENSES 1,677 480OTHER EXPENSES 782 297DEPRECIATION AND AMORTISATION 73 44PRE PROVISIONING PROFIT 10,704 6,337PROVISIONS AND CONTINGENCIES 700 175PBT 10,004 6,162PROVISION FOR TAX 2,480 1,241OF WHICHCURRENT TAX 2,485 1,293DEFERRED TAX -113 -63FRINGE BENEFIT TAX 108 11SHARE OF PROFIT OF MINORITY INTEREST -113 -DILUTION EFFECT 13 -SHARE OF PROFIT OF ASSOCIATES (EQUITY METHOD) -2 118PAT NET OF MINORITY INTEREST 7,422 5,039EPS: BASIC (IN RS.) 5.95 4.48EPS: DILUTED (IN RS.) 5.93 4.45
INFORMATION TECHNOLOGY (IT)
IDFC continues to leverage IT to provide services of high standard to its customers. By and large the use of IT at IDFC is to streamline the Company's back office functions and integrate businesses across tasks, departments and geographies. Much of 2007-08 was spent in aligning the IT backbone including infrastructure, application and compliance with the needs of IDFC's rapidly growing businesses and acquisitions.
IDFC completed work on developing a remote state-of-the-art Data Recovery Site, which allows for instant recovery of data. This was completed in June 2007 and all server consolidations and backups are in place. The Company also implemented the concept of virtualisation, which addresses critical issues with adequate redundancy and meets most global standards for disaster recovery sites.
On the application front, the core software for project financing has been revamped with improved functionalities and a completely rebuilt code. The entire revamping project was managed in-house with specialised work being outsourced to vendors. The new product has been showcased in March 2008. It is under testing, and will go live in second quarter of FY 2008.
There was seamless integration with SSKI on the IT front during 2007-08. This was done through detailed gap analysis, and the integration was carried out to the extent necessary for optimal functioning of the Company.
Recognising the need for constant monitoring of IT security and processes, the Company subjects itself to IT audits each year. A reputed external agency undertakes an annual audit of IT infrastructure and applications. This was extended to all subsidiaries in 2007-08. This external audit is in progress and will also cover networks and control access across the Company. It is a matter of pride that in the half yearly ISO surveillance audits, there has been no non-conformity in the last three years.
An information security campaign was undertaken in July 2008 to create awareness within IDFC on issues related to IT security including password control, tracking and shoulder surfing.
FINANCIAL REVIEW
The abridged consolidated profit and loss accounts of IDFC for 2007-08 are presented in Table 2.
IDFC recorded a strong financial performance during 2007-08. IDFC's operating and other income grew by almost 85% in 2007-08 to Rs.13,236 million. Revenues (net of financing costs) from direct infrastructure lending activities grew by 44% to Rs.5,650 million in 2007-08. Non-interest income, which includes fees, capital gains and dividends, increased by 131 % to Rs.6,180 million in 2007-08.
Significant growth in operating income was also accompanied by an increase in operating expenses of 208% to Rs.2532 million. Manpower expenses witnessed a sharp rise-increasing almost 3.5 times from Rs.480 million in 2006-07 to Rs.1,677 million in 2007-08 due to the following factors viz. hiring new people, the additional manpower costs of the new acquisitions and the internal salary revisions that were carried out to align
IDFC's remuneration structures with the top half of the industry.
Expansion in lending activities has been accompanied by an increase in provisioning, to Rs.700 million. IDFC maintains very strict provisioning standards that go beyond stipulated norms. IDFC has 0.03% net NPAs; and its gross NPAs were only 0.17%.
There has been a robust growth in profits. The Company's Profit Before Tax (PBT) grew by 62% to Rs.10,004 million in 200708. Profit After Tax (PAT net of minority interests and associate companies) increased by 47% in the same period, to Rs.7,422 million.
Growth, however, has resulted in a slight decline in profitability ratios, as Table 3 shows. In part, this is a natural shortterm outcome of being in
an accelerated growth phase. Moreover, higher profits and capital raising during the year have significantly increased the Company's reserves and surplus: the total equity base has almost doubled from Rs.29,476 million in 2006-07 to Rs.55,933 million 2007-08. The Company's leverage ratio has decreased from 5.1 in 2006-07 to 4.0 in 2007-08. This has led to a small, albeit temporary, decline in Return On Equity (ROE) from 17.7% in 2006-07 to 15.6% in 2007-08.
RISK MANAGEMENT
IDFC has well-established systems and procedures for risk management which function under the close oversight of an in-house expert committee called the Risk Group. This group is actively engaged in areas of loan portfolio assessment, asset-liability management, and loan pricing. In addition, it focuses on developing various market risk modules.
Regarding portfolio review, the Risk Group comprehensively examines the entire project assets and equity investments on a semi-annual basis. Each credit is analysed individually and then integrated at the portfolio level. The overall portfolio risk report is regularly presented to an independent committee of the Board of Directors.
2007-08 2006-07
PBDT TO TOTAL INCOME 35.9% 39.5%PBT TO TOTAL INCOME 35.6% 39.2%PAT TO TOTAL INCOME 26.4% 32.1%ROE 15.6% 17.7%
The Risk Group also closely focuses on Asset Liability Management (ALM). To further enhance the effectiveness of the current process of regular monitoring of liquidity and interest rate risks, IDFC has sourced a sophisticated software-based ALM system. This will enable the Company to capture data from various disparate platforms, and allow for a more detailed and comprehensive analysis.
Given the rising volatility of interest rates as well as introduction of new products in the treasury portfolio, IDFC has also in creased the level of monitoring of market risk. This involves measuring interest rate risk on a regular basis as well as testing newer models for analysis.
With the regulatory framework for banks and financial institutions currently in transition to a Basel II environment, the risk measurement and monitoring frame work is being accordingly enhanced. IDFC has initiated efforts to align the capital allocation to different asset categories along the Basel II framework suggested under emerging regulatory guidelines.
The Risk Group works in close coordination with the Credit Policy Committee of the Board of Directors through presentations and deliberations on significant issues in risk management. Feedback and advice from the Credit Policy Committee are incorporated in various applications.
INTERNAL CONTROLS AND THEIR ADEQUACY
The Company has a proper and adequate system of internal controls to ensure that all assets are safeguarded and protected against loss from unauthorised use or disposition, and that the transactions are authorised, recorded and reported correctly.
Internal controls are supplemented by an extensive programme of internal audits, review by management and documented policies, guidelines and procedures. These controls are designed to ensure that financial and other records are reliable for preparing financial information and other reports, and for maintaining regular accountability of the Company's assets.
CAUTIONARY STATEMENT
Statements in this Management Discussion and Analysis describing the Company's objectives, projections, estimates and expectations may be forward looking statements' within the meaning of applicable laws and regulations. Actual results might differ substantially or materially from those expressed or implied. Important developments that could affect the Company's operations include unavailability of finance at competitive rates-global or domestic or both, reduction in number of viable infrastructure projects, significant changes in political and economic environment in India or key markets abroad, tax laws, litigation, exchange rate fluctuations, interest and other costs.
ANNUAL REPORT 2007-2008
DIRECTOR'S REPORT
TO THE SHAREHOLDERS
Your directors have pleasure in presenting the Eleventh Annual Report together with the audited accounts for the year ended March 31, 2008.
FINANCIAL RESULTS
PARTICULARS (FIGURES IN RS. MILLION) FY 2007-08 FY 2006-07
OPERATING INCOME 25,237 15,005OTHER INCOME 117 52TOTAL INCOME 25,354 15,057LESS ADMINISTRATIVE EXPENSES* 1,133 614LESS PROVISION FOR ASSETS AND LOSSES 688 174LESS INTEREST AND OTHER CHARGES 14,802 8,554PROFIT BEFORE TAX 8,731 5,715LESS PROVISION FOR TAX ** 2,039 1,086PROFIT AFTER TAX 6,692 4,629
* Administrative expenses include staff expenses; travelling & conveyance; postage telephone & telex; establishment expenses; other expenses and depreciation
** Provision for Tax is net of Deferred Tax
INCOME FROM OPERATIONS increased by 68% from Rs.15,005 million in 200607 to Rs.25,237 million in 2007-08. IDFC's total income, increased by 68% from Rs.15,057 million in 2006-07 to Rs. 25,354 million in 2007-08.
Profit Before Tax (PBT) increased by 53% from Rs.5,715 million in 2006-07 to Rs.8,731 million in 2007-08. Profit After Tax (PAT) increased by 45% from Rs.4,62 million in 2006-07 to Rs.6,692 million in 2007-08.
IDFC's quality of assets continued to be good with 0.03% Net NPAs as on March 31, 2008.
DIVIDEND
Your Directors are pleased to recommend a dividend of 12% for the year ended March 31, 2008. OPERATIONS REVIEW
Leveraging the opportunities provided by a growing economy, the Company continues to see healthy growth in its lending activities. Gross approvals increased by 56% from Rs.130,530 million in 2006-07 to Rs.203,090 million in 2007-08, while net approvals increased by 104% from Rs.78,530 million in 2006-07 to Rs.159,900 million in 2007-08. Gross disbursements, increased by 67% from Rs.72,070 million in 2006-07 to Rs.120,060 million in 2007-08, while net disbursements increased by 85% from Rs.41,910 million in 2006-07 to Rs.77,550 million in 2007-08.
As on March 31, 2008, IDFC's total exposure to infrastructure projects was Rs.340,000 million of which Energy was the highest (36.9%), followed by Transportation (23.3%) and Telecommunication & IT (15.8%). IDFC's exposure to Commercial and Industrial sector was at 9.8%.
IDFC continued to strengthen its proprietary equity business and in 200708, net approvals were Rs.7,480 million, while net disbursements were Rs.3,080 million.
While the investment strategy for treasury operations continues to ensure adequate levels of liquidity to support core business requirements, it has started focusing on optimizing levels of return and functioning as a profit centre investing in fixed income securities, while maintaining prudent safety norms. Net interest income from treasury operations increased by 249% from Rs. 370 million in 2006-07 to Rs. 1,290 million in 2007-08.
With the acquisition of SSKI there has been a structural shift in its advisory services practice. The Company's entire suite of advisory services ranging from debt syndication, structured finance to equity and debt market services has been brought under one platform to supplement the existing stock broking and investment banking services already existing within SSKI.
The Policy Advisory Group continued to contribute to IDFC's mandate of leading private capital to infrastructure projects, by providing impetus to rationalisation of policy and regulatory frameworks.
In private equity, the Company is in the process of funding the first tranche for the landmark US $1.25 billion project equity fund being developed by IDFC along with Citigroup and IIFCL.
During the year, fee income increased substantially on account of increasing focus on asset management business and structured deals in debt syndication and private equity placement.
Detailed analysis of the performance of the Company and its businesses, including initiatives in the area of Human Resources, Information Technology and Risk Management, has been presented in the section on Management Discussion and Analysis of this Annual Report
SUBSIDIARY COMPANIES
As the Company expanded its business domain, it has also increased its subsidiary companies. IDFC has eight direct subsidiary companies - IDFC Private Equity Company Limited, IDFC Trustee Company Limited, IDFC Investment Advisors Ltd, IDFC-SSKI Securities Limited, IDFC Project Equity Company Limited, IDFC PPP Trusteeship Company Limited, IDFC Capital Company Limited and Feedback First Urban Infrastructure Development Company Limited. IDFC-SSKI Private Limited and IDFC-SSKI Stock Broking Limited are subsidiaries of IDFC-SSKI Securities Limited. Similarly, Feedback First Urban Infrastructure Development Company Limited has further floated a subsidiary called IDFC Projects Limited, which will be a stand-alone infrastructure developer.
A statement of particulars of IDFC's subsidiaries is annexed to this report.
JOINT VENTURES
IDFC has two joint ventures Infrastructure Development Corporation (Karnataka) Limited (iDeCK) in the state of Karnataka and Uttaranchal Infrastructure Development Company Limited (UDeC) in the state of Uttaranchal. These jointventure companies are engaged in advisory and project development work in the area of infrastructure at respective state level.
PARTICULARS OF EMPLOYEES
IDFC had 199 employees as on March 31, 2008. Particulars of employees as required to be furnished pursuant to Section 217(2A) of the Companies Act, 1956, read with the rules there under, forms part of this Report. However, as per the provision of Section 219(1)(b)(iv) of the Companies Act, 1956, the reports and accounts are being sent to all the shareholders of the Company excluding the statement of particulars of employees. Any shareholder interested in obtaining a copy may write to the Company Secretary of the Company.
EMPLOYEES STOCK OPTION SCHEME (ESOS)
Pursuant to the resolution passed by the members at the Extra- Ordinary General Meeting held on August 2, 2006, IDFC has introduced Employee Stock Option Scheme 2007 (referred to as 'the scheme') to enable the employees of IDFC and its subsidiaries to participate in the future growth and financial success of the Company. Out of the 7,194,683 options outstanding at the beginning of the year, 388,164 options lapsed on account of resignations and 3,016,583 options were exercised during the year.
Additionally, during 2007-08, 2,486,203 options were granted to eligible employees under the Scheme. Accordingly, 6,276,139 options remain outstanding as of March 31, 2008.
All options vest over 3 years - 30% each vest after first and second year of the grant and 40% vest after the third year. The Company has used the intrinsic value method to account for the compensation cost of option to employees of the Company. Intrinsic value is the amount by which the quoted market price of the underlying share on the date prior to the date of the grant exceeds the exercise price on the option.
Disclosures as required by Clause 12 of the SEBI Employees Stock Option SchemE and Employee Stock Purchase Scheme Guidelines, 1999 are annexed to this report.
CORPORATE GOVERNANCE
Separate detailed chapters on Corporate Governance, Additional Shareholder Information and Management Discussion and Analysis are attached herewith and forms part of this annual report.
PUBLIC DEPOSITS
During 2007-08, your Company has not accepted any deposits from the public within the meaning of the provisions of the Non-Banking Financial Companies (Reserve Bank) Directions, 1998.
FOREIGN EXCHANGE
The particulars regarding foreign exchange expenditure and earnings are furnished at Item No. 15 & 16 in the Notes to the Accounts. Since the Compam does not own any manufacturing facility, the other particulars in the Companies (Disclosure of Particulars in the Report of the Board of Directors) Rules, 1998 are not applicable.
RAISING OF FUNDS
The Company raied Rs. 21,000 million byway of QIP during the year. The funds have been used for the purpose of genera business of the Company. The Company is also seeking an enabling resolution to raise US$ 750 million over next 12 - 18 months.
DIRECTORS
The Board, at its meeting held on July 25, 2007, appointed Mr. Abdul Rahim Abu Bakar as Director with effect from July 25, 2007 and he holds office up to the date of the ensuing Annual General Meeting (AGM).
Mr. Mohan Rajasooria, Alternate Director for Mr. Abdul Rahim Abu Bakar, resigned with effect from November 23, 2007. The Board wishes to place on record its sincere appreciation of his valuable contribution to the Company.
Mr. Vinod Rai, Secretary (Financial Services), Ministry of Finance, Government of India, ceased to be Director with effect from January 3, 2008. The Board wishes to place on record its sincere appreciation of his valuable contribution to the Company.
The Board, at its meeting held on February 19, 2008, appointed Mr. Arun Ramanathan, Secretary (Financial Sevices), Ministry of Finance, Government of India, as Director with effect from February 19, 2008 and he holds office up to the date of the ensuing Annual General Meeting.
In accordance with the Articles of Association of the Company and provisions of the Companies Act, 1956, Mr. Dimitris Tsitsiragos, Dr. Omkar Goswami and Mr. Shardul Shroff retire by rotation and being eligible, offer themselves for re-appointment at the ensuing AGM.
INTERNAL CONTROL SYSTEMS
The Company has in place adequate systems of Internal Control to ensure compliance with policies and procedures. Internal Audits of all the units of the Company are regularly carried out to review the internal control systems. The Internal Audit Reports along with implementation and recommendations contained therein are constantly reviewed by the Audit Committee of the Board.
AUDITORS
Messrs. Deloitte Haskins and Sells, Chartered Acountants, will retire as the statutory auditors of the Company at the ensuing AGM. The Board, at its meeting held on April 28, 2008, has proposed their re-appointment as Auditors to audit the accounts of the Company for the financial year ending March 31, 2009.
Messrs. Deloitte Haskins and Sells, the retiring auditors, have confirmed that their re-appointment, if made, would be in conformity with the provisions of Sections 224 and 226 of the Companies Act, 1956, as also indicated their willingness to be re-appointed.
DIRECTORS' RESPONSIBILITY STATEMENT
The Directors confirm that:
- in the preparation of the annual accounts, the applicable accounting standards have been followed;
- they have selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent, so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profits of the Company for the year;
- they have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956, for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; and
- they have prepared the annual accounts on a going concern basis.
ACKNOWLEDGEMENTS
IDFC has developed close relationships with the Ministry of Finance (MoF), Financial Services Division (MoF), Ministry of Surface Transport, National Highways Authority of India, Ministry of Power, Department of Telecommunications, Ministry of Petroleum and other Ministries of the Government of India involved with infrastructure development; the Reserve Bank of India and regulatory bodies, TRAI, the Central Electricity Regulatory Commission and State Electricity Regulatory Commission; the Planning Commission; ITT (Kanpur); IIM (Ahmedabad); the State Governments and all IDFC's Shareholders. The Board of Directors wishes to gratefully acknowledge the assistance and guidance received from all of them. IDFC could make the progress it has in these years due to the dedication and creativity of its staff at all levels. The Board of Directors wishes to place on record its warm appreciation for these efforts.
For and on behalf of the Board
DEEPAK S. PAREKH Chairman Mumbai,June 7, 2008
ANNEXURE
PARTICULARS OF DISCLOSURE AS REQUIRED UNDER SEBI (EMPLOYEE STOCK OPTION SCHEME AND EMPLOYEE STOCK PURCHASE SCHEME) GUIDELINES, 1999
PARTICULARS 2007-2008
1. Options outstanding as at the beginning of the year 7,194,683
2. Options granted during the year 2,486,203
Options maybe granted at a price not less 3. Pricing Formula than the face value per share. Options have been granted at Rs.17.48 and at Rs.146.06.
4. Options Vested* 3,016,683
5. Options Exercised* 3,016,683
6. Total no. of shares arising as result of exercise of Options 3,016,683
7. Options lapsed** 388,164
8. Variation in terms of Options None
9. Money realised by exerise of options (Rs. in million) 52.73
10. Total number of options in force* 6,276,139
* The number of options have been reported as on 31.03.2008
** Lapsed Options includes options cancelled/lapsed.
11. Employeewise details of options granted to:
- Senior Management 150,000
- any other employee who receives a grant in any one year of option amounting to 5% or more of option granted during that year None
- employees who were granted options, during any one year, equal to or exceeding 1% of the lone issued capital (excluding warrants and conversions)) of the Company at the time of grant None
12. Diluted Earnings Per Share pursuant to issue of shares on exercise of option calculated in 5.34accordance with AS 2. Earnings Per Share (Rs.)
13. Pro Forma Adjusted Net Income and Earnings Per Share
PARTICULARS RUPEES (IN MILLION)
Net IncomeReported 6,691.74Add: Intrinsic Value Compensation Cost 29.42Less: Fair Value Compensation Cost 32.16Adjusted Pro Forma Net Income 6,689.00Earning Per Share: BasicAs Reported (Rs.) 5.36Adjusted Pro Forma (Rs.) 5.36Earring per Share DilutedAs Reported (Rs.)) 5.34Adjusted Pro Forma (Rs.) 5.34
14. Weighted average exercise price of Options granted during the year whose:
(a) Exercise price equals market price NA(b) Exercise price is greater than market price NA(c) Exercise price is less than market price 117.81
15. Weighted average fair value of Options granted during the year whose:
(a) Exercise price equals market price NA(b) Exercise price is greater than market price NA(c) Exercise price is less than market price 95.96
ANNEXURE
PARTICULARS OF DISCLOSURE AS REQUIRED UNDER SEBI (EMPLOYEE STOCK OPTION SCHEME AND EMPLOYEE STOCK PURCHASE SCHEME) GUIDELINES, 1999 (continued):
PARTICULARS 2007-2008
The fair value of the options granted has been estimated using the Black-Scholes option pricing Model. Each tranche of16. Description of method and vesting have been considered as a significant assumptions used to separate grant for the purpose of estimate the fair value of options valuation. The assumptions used in the estimation of the same has been detailed below:
VARIABLES Weighted average values for all grants made during the year Stock Price (Rs.) 176.72Volatility 47.02%Risk free Rate 7.51%Exercise Price (Rs.) 117.81Time To Maturity 3.60Dividend yield 1.42%Weighted Average Value (Rs.) 96.06
Stock Price: Closing price on NSE as on the date of grant has been considered for valuing the grants.
Volatility: There is no adequate price history for the shares since the Listing of the shares of the Company on a recognized stock exchange. We have not adopted the volatility of a peer group company as recommended by the guidelines as there are no such peer group companies. For the options granted after the listing of the shares the historical volatility till the date of grant has been considered to calculate the fair value.
Risk-free rate of return: The risk-free interest rate being considered for the calculation is the interest rate applicable for a maturity equal to the expected life of the options based on the zero-coupon yield curve for Government Securities.
Exercise Price: Options have been granted at a price of Rs. 17.48 arrived by the independent valuer pre-listing except for one grant where the price is Rs. 146.06
Time to Maturity: Time to Maturity / Expected Life of options is the period for which the Company expects the options to be live. The minimum life of a stock option is the minimum period before which the options cannot be exercised and the maximum life is the period after which the options cannot be exercised.
Expected divided yield: Expected dividend yield has been calculated as an average of dividend yields for the two financial years preceding the date of the grant. MANAGEMENT DISCUSSION AND ANALYSIS
Infrastructure Development Finance Company Limited (IDFC' or the Company') finances the infrastructure needs of India. Its success over the last few years - especially as a listed entity after its initial public offering in July 2005 - has been due to the combination of many factors. The key ones are: the sheer demand for infrastructure in the country, IDFC's acknowledged expertise in all areas of infrastructure, the Company's ability to tap global as well as Indian financial resources, its strategy to be a one-stop shop' for infrastructure and a strong synergy between the Company's professional Management and its Board of Directors and key shareholders that allows it to expeditiously pursue opportunities for yet more profitable growth.
IDFC HAS SEEN ACCELERATED GROWTH
in 2007-08 both in revenues and profits. The size of the Company's consolidated balance sheet increased by 57% - from Rs.183,840 million in 2006-07 to Rs.289,400 million in 2007-08. This quantum jump brings with it economies of scale and an increase in scope of opportunities. It transforms IDFC's positioning from being a niche player to a powerhouse among Indian financial intermediaries.
Not only does the Company now have a large asset base but it is also of very good quality. IDFC has 0.03% net Non-Performing Assets (NPAs) and only 0.17% gross NPAs.
THE SCENARIO: GLOBAL AND INDIAN
IDFC's growth in business and profits is even more credible given the bearish scenario in global as well as Indian markets in the second half of 2007-08.
THE GLOBAL SITUATION AND OUTLOOK The US It is best to begin with the US. For a nation whose people save little or nothing, a very large part of consumer spending in the US has been predicated upon home equity values. Since the mid-1980s, the US consumers have relied more and more on drawing credit lines based on the value of their housing assets to meet consumption and other needs. This home equity-based consumption growth started being threatened by the state of the housing market, which began to go downhill since December 2006. According to the S&P Case-Shiller housing prices index, there has been a sharp drop in the housing price inflation rate: from 15.4% in November 2004 to (-)14% in March 2008. As yet, there is no sign of an upturn.
This fall in home prices has significantly increased debt defaults - especially for borrowers who took the 2/28' mortgage loans, which carried a low fixed rate for the first two years, and floating rates for the next 28. With resets to floating rates taking place, many have failed to pay their loan obligations. This is not limited to the sub-prime borrowers but has spread in varying measures to other categories as well. Up to July 2005, the long-term average monthly foreclosures was around 79,000. That number has gone up to 234,685 in March 2008-indicating a 57% growth in foreclosures in a year. It is estimated that 2008 and 2009 together will see an extra two million home loan foreclosures.
Fall in home equity and foreclosures have severely dampened consumer sentiments in the US. As if these were not enough, gasoline prices have sky-rocketed and, in effect, have imposed a tax equivalent to 2% of US household disposable income. From a peak growth rate of 5.2% in June 2007 (over June 2006), non-gasoline retail sales growth in the US was down to 0.6% in March 2008. Consequently, in January March 2008, de-seasonalised growth in personal consumption expenditure fell to 1 % over the previous quarter-the lowest growth of real personal consumption expenditure in the last 27 quarters.
That US GDP growth in Q1 2008 was not negative is just a mirage. The 0.6% sequential growth of GDP in Q1 2008 was entirely due to an unnatural rise in inventories in January-March 2008. Net of the sharp spike in inventories, US growth had already moved into negative territory. And almost every economist predicts a full blown recession in Q2 2008.
It is difficult to predict how long the US recession will last. For one, housing prices are not expected to come back to an even keel (out of negative to zero inflation) until October-December 2008, if not a quarter later. For another, if crude oil prices continue remaining in triple digits, there is little to expect in terms of a consumer demand recovery over the next few quarters.
To be sure, there are some positives in the horizon. The US Federal Reserve has moved with exceptional agility, foresight and decisiveness. Today, 3-month US interest rates are down to 1.91 % and the yield on 10-year treasury bills is ruling at 3.86% - among the lowest in the developed world. The Fed's decisive action in facilitating J.P. Morgan's bail-out of Bear Stearns has also instilled much needed confidence in a shattered financial system and the steadily depreciating dollar has boosted US exports and finally begun to reduce the country's massive current account deficit.
However, there is still a great deal of pain left in the US economy and its financial markets. If UBS's, Citigroup's and Merrill Lynch's Q1 2008 losses are a harbinger of things to come, then write-downs from the sub-prime crisis are expected to continue. In fact, the IMF has estimated losses from the US financial crisis at a staggering US $945 billion.
The UK and the Euro zone
The UK, too, is in trouble. Also beset by housing sector worries and poor retail spending, GDP growth from the UK is expected to reduce to somewhere between 1.5% and 1.8% in 2008. In fact, the normally laissez faire Bank of England offered to swap government bonds for mortgage securities to kickstart bank lending; and in April 2008, it cut the benchmark interest rate by 25 basis points to 5%- its second rate cut since December 2007.
The Euro zone is also in a worse shape than before. With a slowdown in growth and a rise in consumer price inflation, the European Central Bank (ECB) is caught in a bind. As of now, it has maintained its anti-inflationary stance by remaining firm with its interest rate. That has kept the euro at uncompetitive levels vis-a-vis most currencies, especially in relation with the US dollar. But with the spectre of lower growth in France, Italy and Germany, and the possibility of a serious real estate sector-driven financial crisis in Spain, it may be a matter of time before the ECB has to jump into the fray. The Euro zone is expected to witness at least a 1 percentage point decline in GDP growth compared to 2007 -achieving 1.5% to 1.7% growth in 2008.
All this bodes ill for the supply of global capital. Banks, private equity and hedge funds, and other suppliers of capital have suffered throughout 2007, and have significantly lower risk appetite compared to a couple of years ago. This has increased the cost of global capital, either as debt or equity. Moreover, the recent depreciation of the rupee vis-avis the US dollar and the euro - down by 7.6% versus the dollar between January and mid-May 2008, and 12.1 % versus the euro - has increased the effective cost of international borrowings. In addition, restrictions by the Reserve Bank of India (RBI) on external commercial borrowings has almost blocked off the possibility of taking on greater foreign debt.
India
India's GDP growth is also slowing down - but not like the US, the Euro zone or the UK. After two consecutive years of 9% and 9.7% growth, it looks as if GDP growth for 2007-08 will be marginally lower at 8.7%. That is not a cause of concern. What is, however, worth noting is that GDP growth for 2008-09 will be lower still. The estimates vary between 7.5% and 8% - less than before, but still making India the second fastest growing large economy, after China.
While 7.5% growth will still be creditable, especially in an overall bearish milieu, there are concerns about growth in infrastructure spending. This is showing up in the slowing down of construction activity. Until July-September 2007, the construction sector achieved at least 10% annualised growth for 18 straight quarters. In October-December 2007, it grew by 8.4% -which is significantly less than its average performance over the last four years.
In fact, despite impressive GDP growth right up to 2007-08, the pace of infrastructure development in India remains a matter of concern. Chart B shows that, in the last three years, growth in infrastructure, as measured by the Indian infrastructure index, has lagged behind GDP growth. In 2007-08, the difference has been particularly sharp. A key economic and governance issue is how India can raise this growth to equal, if not exceed, GDP growth-without which it will be difficult to raise India's growth rate on a sustainable basis. It is a matter of concern for all policy-makers and players in the infrastructure space, including IDFC.
OUR BUSINESS STRATEGY
Each sizeable infrastructure project can be divided into different elements that are distributed across different timelines, with each having its own risk and return profile. Diverse risk-return profiles have varying implications for providers of capital, be it equity or debt. Thus, a single infrastructure project can be disaggregated to provide value propositions for different players across the project lifecycle. IDFC's core competitive edge lies in its ability to comprehend the different incentives and successfully create disaggregated, yet interconnected, packages that meet each of the many objectives, and provide win-win solutions for the client and the Company.
In line with its strategy outlined over the last two years' annual reports, IDFC continued to focus on enhancing its services as a 'one-stop shop' for financial intermediation into the infrastructure sector. The objective is to become India's specialist infrastructure bank, spanning the entire value chain. In doing so, IDFC focuses on working with sponsors right from inception to fruition of infrastructure projects. This requires the Company to offer a suite of services and products that not only captures the entire mind-space of sponsors so that whenever they think of infrastructure, they think of IDFC, but one that makes financial and long term strategic sense for the Company.
Thus, in addition to IDFC's loans, there has been a concerted effort at developing businesses that generate non-interest income from fees and capital gains from investments. These businesses are important on at least two counts. They provide critical support to customers in executing infrastructure projects, by sharing risks and realising gains along with the sponsors. Moreover, they provide a more profitable income source in the long run.
TABLE 1 RETURN ON ASSETS TREE % OF AVERAGE TOTAL ASSETS
PARTICULARS 2007-08 2006-07
INFRASTRUCTURE 2.4% 2.6%TREASURY 0.5% 0.2%NET INTEREST INCOME 2.9% 2.8%PRINCIPAL INVESTMENTS 0.9% 0.9%ASSET MANAGEMENT 0.2% 0.4%IDFC-SSKI 0.8% 0.0%ADVISORY AND OTHER FEES 0.7% 0.5%NON-INTEREST INCOME 2.0% 1.8%OTHER INCOME 0.1% 0.1%TOTAL 5.6% 4.7%
After two years of trial, 2007-08 saw major traction in this area, with a significant growth in the Company's non-fund based businesses. Non-interest income (i.e. income from principal investments, asset management, investment banking, and other fees) grew by 131% in 2007-08. This is no longer high growth over a low base. The share of non-interest income in IDFC's total operating income has increased from 37% in 2006-07 to 47% in 2007-08. Today, these non-interest incomes have attained critical mass in IDFC's portfolio.
To streamline and increase the Company's offerings in non-balance sheet intensive businesses, IDFC made two major strategic acquisitions in 2007-08. These were in SSKI Securities and the Standard Chartered Mutual Fund, India.
It may be recalled that in September 2006, IDFC had acquired 33.33% stake in SSKI Securities. In the middle of 2007, it further increased the stake to 66.66% by buying out the shares held by the founder and, in March 2008, the stakes were increased to 79.80%.
With its leadership position in investment banking in the infrastructure space and a strong institutional brokerage and research platform, SSKI forms a perfect fit for IDFC. With its 80% stake in SSKI, IDFC has now re-organised its corporate finance and advisory business including debt syndication, structured finance and corporate debt and equity market advisory under the IDFCSSKI business platform. In addition, the acquisition has allowed IDFC to enter the institutional equities business, a strong base from which to expand the Company's franchise in the wider investment banking landscape.
In March 2008, Standard Chartered Bank agreed to sell to IDFC, the Standard Chartered Trustee Company Private Limited and the Standard Chartered Asset Management Company, which handles its mutual fund business in India. The acquisition was carried out for a total cash consideration of approximately US$205 million, before deductions for local taxes and deal expenses. This investment is in line with the Company's strategy of broadening its footprint in the asset management business.
This platform will give IDFC entry into the mutual fund space and thereby allow it to scale up fee generating assets under management and regulations permitting to also tap new pools of funding for listed infrastructure companies.
As a financial intermediary, it is important to track the Return On Assets (ROA) generated by the Company. Table 1 shows that with the accelerated growth in noninterest income, IDFC's ROA (net operating income as a ratio of average assets) increased from 4.7% in 2006-07 to 5.6% in 2007-08. While the ROA from net interest income remained stable at around 2.9%, there has been an increase in the ROA from non-interest incomes from 1.8% in 2006-07 to 2.6% in 2007-08.
In July 2007, the Company raised $ 519 million in a QIP. Consequently, the leverage ratio has decreased from 5.1 in 2006-07 to 4.0 in 2007-08. The lower leverage ratio is a temporary phenomenon that gives the Company some running room to continue to expand its balance sheet while maintaining its AAA status with the rating agencies.
OUR BUSINESSES
Today, the Company has a balanced business model, akin to a four-wheel driven car, that can navigate a client through, or direct capital and services to, any part of the entire infrastructure value chain, from the pre-development stage of a project to the construction, operations, refinancing and exit stages of the investment life cycle. The four wheels of the car are the following four business verticals that together give the Company a scalable and diversified revenue stream:
- Project Finance
- Principal Investments and Treasury
- Investment Banking
- Asset Management
IDFC'S FOUR WHEEL DRIVE MODEL can be bifurcated into the front two wheels comprising the capital intensive balance sheet business including the loan book, which give modest returns but provide and scale client reach; and the principal investment and treasury business, which can generate superior ROES but with less predictable revenue streams.
The rear two wheels comprise the Company's capital light businesses investment banking, which has high but volatile returns, and asset management (including private equity, project equity, fund of funds, public market alternatives and mutual fund), which not only has high returns, but can also deliver scalable and more predictable revenue streams.
In addition, the Company also has an advisory group that works closely with the Government of India and various state governments on policy issues and in creating capacities to develop commercial infrastructure and public-private partnerships.
PROJECT FINANCE
IDFC's primary business activity remains providing debt financing for infrastructure projects, and the assets thus created continue to be the largest portion of the Company's asset book. Given the nature and scope of different infrastructure projects, some project finance activities also translate into placement of equity and mezzanine debt products. Project finance also provides IDFC many opportunities to generate fee income from related advisory services. Highlights of project finance for 2007-08 are given below.
The Company provides debt and equity finance primarily to four infrastructure sectors: Energy, Transportation, Telecom & IT, and Commercial & Industrial. IDFC's total exposure to these sectors increased by 54.2% from Rs.220,400 million in 2006-07 to Rs.340,000 million in 2007-08.
As Chart C shows, Energy still comprises the largest exposure, followed by transportation, then Telecom & IT, and finally Commercial and Industrial. There has also been a sizeable increase in share of Others' in 2007-08. This has come about mainly from IDFC's foray into cement and steel which, in its first year, accounted for 2.6% of the Company's total exposure.
Given IDFC's objective to provide equity as well as debt finance, it is not surprising that the share of loans in total exposure reduced from 89.5% in 2006-07 to 86.5% in 2007-08. Even so, loans still constitute over 85 % of the Company's business.
Of the 86.5% share of loans, 52.5% was on account of specific project loans, 26.4% was in the form of corporate loans and 7.6% was loan against shares.
- As on March 31, 2008, IDFC's infra loans increased by 42.4% to Rs.201,533 millionversus Rs.141,503 million a year earlier
- Gross approvals, including equity and non-funded assistance, increased by 56% to Rs.203,090 million in 2007-08, while net approvals grew by 104% to Rs.159,900 million
- Gross disbursements, including equity, increased by 67% to Rs.120,060 million in 2007-08, while net disbursements grew by 85% to Rs.77,550 million
Energy
With rapid economic growth, India continues to witness major power supply problems. Hence, there has been, and will continue to be, a significant ramp up in investments in power in terms of generation, transmission and distribution of power. In addition, unbundling and provision of open access provides a further growth stimulus to this sector. Given below is the Company's performance in the energy sector in 2007-08.
- As on March 31, 2008, IDFC's total exposure in the energy sector was Rs.125,320 million
- Gross approvals including equity and non-funded assistance increased by 22% to Rs.60,640 million in 2007-08; and net approvals grew by 92% to Rs.51,280 million
- Gross disbursements, however, fell by 16% to Rs.24,610 million; net disbursements, too, declined by 41 % to Rs.13,550 million in 2007-08
While there was a fall in disbursement to this sector in 2007-08, most of it is a timing issue. With significant growth in net exposure, there is large business awaiting to be translated to actual disbursements. Chart D plots the data of IDFC's steady growth in energy over the last five years.
IDFC continues to focus on projects that have appropriate risk return profiles in power generation. The Company is focusing on a strategy of developing strong partnerships with different players in the sector, some of whom are also first time participants. The partnering process often extends to arranging equity for the sponsors. While most of the stress is on thermal generation, IDFC is also aggressively pursuing hydro-electric projects in the small and medium scale. Identifying the immense potential in renewable power like wind or solar, IDFC has actively partnered players in the wind energy space. This includes equipment manufacturers and wind farm developers.
Transportation
This sector encompasses the development of roads, civil aviation, airports, ports, container terminals, and gas and oil pipelines. Highlights of IDFC's performance in 2007-08 are:
- As on March 31, 2008, IDFC's total exposure in transportation was Rs.79,150 million
- Gross approvals, including equity and non-funded assistance increased by 121 to reach Rs.47,830 million in 2007-08 and net approvals increased by 115% to Rs.33,500 million
- Gross disbursements grew by 70% to Rs.27,660 million in 2007-08, while net disbursements increased by 35% to Rs.14,060 million
Chart E shows IDFC's gross approvals and disbursements in the transportation sector over the last five years. After the slowdown in 2006-07, gross approvals and disbursements have regained their growth trend in 2007-08.
There have been some significant publicprivate partnership models in the roads sector, with several successes in toll-based road financing. Although these projects have lower margins, there is immense opportunity in this sector and IDFC continues to aggressively partner sponsors in roads, with an emphasis on National Highway Authority of India (NHAI) projects and state level highways.
IDFC has played a lead role in privatisation of airports and continues to leverage opportunities to finance and advise on such projects. The Company has also extended its play in aviation by funding aircraft acquisitions and helping in the consolidation of airlines. Going forward, IDFC expects increased activity on the logistics front, especially with selective opening up of railways and container traffic, and the development of urban mass transportation systems.
Telecom & IT
Telecom & IT today has become a mature business in India. Significant growth has coincided with the consolidation of the industry by a few very large enterprises, each having major internal funding capacity. IDFC, therefore, has re-calibrated its business strategy in the Telecom and IT space, and is now focusing on specific niche areas. Highlights of the Company's performance in 2007-08 are:
- As on March 31, 2008, IDFC's total exposure in Telecom & IT was Rs.53,560 million
- Gross approvals grew by 3% to Rs.33,310 million in 2007-08; net approvals increased by 6% to Rs.26,350 million
- Gross disbursements increased significantly in 2007-08 - rising by almost 210% to Rs.36,670 million. Net disbursements also grew to Rs.25,770 million
Chart F shows IDFC's gross approvals and disbursements in the Telecom & IT sector over the last five years. In 2006-07, there was a massive gap between approvals and disbursements-because majority of the approvals of that year translated into disbursements in 2007-08. The sector is witnessing some new sources of increased demand. This is seen by the fact that even in 2007-08, the Company has managed to grow approvals in this sector, which were already at a very high level in 2006-07.
2007-08 saw new licenses being provided to different players, many of whom are new to the business of telecom. The Company aggressively leveraged this opportunity of partnering new entrants; and much of the jump in exposure in telecom comes from a few large deals.
IDFC continues to finance some of the smaller players, and explore opportunities for funding mergers, acquisitions and consolidation. With severe competition, there is pressure on costs in the industry, which calls for players looking at opportunities to share infrastructure facilities. IDFC believes that this is opening up several opportunities in the telecom infrastructure space, especially in telecom towers. In addition, the Company continues to work with IT-enabled service providers who primarily support telecom companies.
Commercial and Industrial Infrastructure
The commercial and industrial sector primarily includes IT Parks, SEZs, commercial property and hotels. Thanks to the construction and real estate boom over the last few years, this sector has attracted considerable attention and investments. Thus, within a short span of time, it now accounts for over 9.8% of IDFC's exposure. Highlights for 2007-08 are:
- As on March 31, 2008, IDFC's total exposure in commercial and industrial infrastructure was Rs.33,340 million
- Net approvals increased by 168% to Rs.19,480 million in 2007-08
- Net disbursements increased by 34% to Rs.15,300 million in 2007-08
With RBI placing restrictions on banks in financing several areas in this sector, there is an increased opportunity for a NonBanking Financial Companies (NBFC) like IDFC. However, while opportunities are abundant, the Company remains cautious with its activities in this space. IDFC believes that availability of commercial space is starting to outstrip demand and that there will be pressure on rentals and sale prices. Therefore, it invests in commercial development only if it believes that the underlying land price is justifiable and the promoter offers significant collateral. Moreover, with a spurt in hotel development over the last couple of years, hotel room availability will increase and, thus, bring down hotel tariffs. The Company's approach here is to be very selective and focus to the extent possible, on the budget segment in hotels, which is expected to witness lower volatility in room rates.
In addition to these sectors, the Company has also extended its foray [into tourism] and entered into financing of greenfield and expansion projects in steel and cement.
Tourism
- In 2007-08, IDFC's exposure in tourism was Rs.21,020 million, or 6.2% of the total
- Net approvals increased 3.8 times to Rs.9,880 million in 2007-08
- Net disbursements increased by 54% to Rs.2,390 million in 2007-08
Steel and Cement
- IDFC's exposure in 2007-08 was Rs.8,980 million, or 2.6% of the total
- Net approvals were Rs.9,020 million
- Net disbursements were Rs.2,100 million
PRINCIPAL INVESTMENT & TREASURY
IDFC's principal investments include direct investments from the Company's own balance sheet. These are typically of four types:
- INFRASTRUCTURE INVESTMENTS,
where the Company supplements its lending activities by taking direct equity stakes in projects or infrastructure companies. These are generally to build longer term relationships with sponsors, and to support them by offering innovative financing tools and sharing risks. Here, the Company expects to benefit from share value appreciation and have a clear exit route at the appropriate time. In addition, IDFC has seeded IDFC Projects Limited, a subsidiary company that will focus on developing a targeted portfolio of infrastructure assets
- FINANCIAL INVESTMENTS, comprise investments in the financial services space including investments in NSE, STCI and ARCIL to generate returns
- INVESTMENT IN VENTURE CAPITAL UNITS, for third party funds which are sponsored and managed by IDFC
IDFC's principal investments business saw significant growth in 2007-08. This business will be managed to within clearly defined parameters and prudential limits relative to the size of the Company's capital base and balance sheet.
- In 2007-08, IDFC's equity asset book grew 2.3 times to Rs.13,500 million. Of this, Rs.3,790 million was financial equity, while Rs.8,520 million was infrastructure equity and Rs.1,180 million was in the form of venture capital units
- Income from the Company's principal investments, which includes dividends and capital gains, increased by 62% from Rs.1,330 million in 2006-07 to Rs.2,160 million in 2007-08
- STRATEGIC INVESTMENTS, where IDFC picks up stakes in entities to further strengthen its business offering or for strategic purpose that is central to the Company's long term business objectives, are treated separately. Investments in SSKI and Standard Chartered Mutual Funds were the key such examples in 2007-08
Treasury
Traditionally, the treasury function has been one of liquidity management for the project finance and principal investing business, with the focus on raising adequate funds at optimal costs to the business. Over the years, IDFC has acquired experience and knowledge in this function, and is now leveraging this skillset to convert the treasury function into a profit centre that focuses on fixed income investments. Investment activities are undertaken within the purview of strict and well defined prudential risk-return norms. While profit is now an objective, the core function still remains efficient liquidity management. Consequently, the Company now has a liquidity book that parks funds for providing liquidity for lending activities and a proprietary book that has the fixed income security investments with profits as a key driver.
- Average treasury assets increased by 105% from Rs.22,771 million in 2006-07 to Rs.46,621 million in 2007-08
- Net interest income from treasury operations increased 3.5 times from Rs.370 million in 2006-07 to Rs.1,290 million in 2007-08
INVESTMENT BANKING: IDFC-SSKI
IDFC-SSKI is the platform on which the Company is developing its investment banking and institutional broking business. SSKI has brought with it a powerful research-based equity franchise, strong institutional relationships across the globe and a recognised infrastructure footprint.
While SSKI always had a strong equities business, after IDFC's acquisition, this entity is emerging as a full service investment bank across debt and equity.
As of March 31, 2008, the total employee strength of IDFC-SSKI was 144. Much of the year has been spent in the postacquisition integration process. Even so, the entity continued with its business and was particularly active in the IPO and QIP advisory space. During 2007-08 IDFC-SSKI contributed Rs.1,963 million to the gross income of IDFC.
ASSET MANAGEMENT
Asset management is one of the critical businesses that will drive the Company's long term growth. IDFC leverages its specialised skill-sets and reputation as a leading investor in the infrastructure space to mobilise global and domestic funds and invest these as equity and debt in infrastructure projects, as well as listed and unlisted Indian companies.
The Company benefits in a variety of ways. First, as the quantum of third party assets increase in volume, IDFC generates a steadier stream of incomes in terms of fees. It also receives a share of the gains from their investments as carry profits. Second, given the risk profile of infrastructure projects, often there is need for equity investments. These assets, under IDFC's management, become an important source of providing such equity and increasing the Company's service offerings. Third, IDFC also invests in the various funds under its umbrella and benefits from the successes of these funds. Fourth, there could be coinvestment opportunities where IDFC's balance sheet could come into play.
Broadly speaking, IDFC, today, has four groups of such assets under its management: private equity, project equity, public market alternatives and mutual funds. In addition, IDFC is launching a private equity fund of funds.
Private Equity
IDFC's private equity business focuses on generating attractive returns for investors by providing equity-based risk capital to early stage and rapidly growing infrastructure focused companies. This business is undertaken through its wholly-owned subsidiary, IDFC Private Equity Company Limited (IDFC Private Equity'). IDFC Private Equity acts as investment manager for funds dedicated to investments in the private equity asset class.
Its first fund, India Development Fund, had a corpus of US $190 million and was the first to raise capital entirely from domestic institutional investors. The first fund has been fully invested and has exited four investments - two of which are partial exits. Through these four exits, the fund has already returned the original corpus of US$ 190 million to its investors.
The second fund, IDFC Private Equity Fund II, raised US $440 million, of which over 70% came from overseas investors. This fund is fully committed and is expected to be fully invested by the first quarter of 2008-09.
During 2007-08, IDFC Private Equity started raising its third fund, IDFC Private Equity Fund III and achieved a soft close of US$ 700 million.
As of March 31, 2008, total assets under IDFC Private Equity's management were around US$ 630 million. With the third fund coming on-stream, the value of assets under management will increase to around US $1.3 billion.
Project Equity
IDFC Project Equity is the manager of third party funds that invest equity in infrastructure projects in core sectors like energy and utilities, transportation & telecommunications to provide its investors with long term stable inflation hedged returns. This will be achieved by investing largely in post-construction phase projects or projects where there is sufficient visibility with respect to their cash flows. These investments typically have a lower risk-return profiles compared to the pure private equity play.
IDFC Project Equity, the manager of the India Infrastructure Fund ('IIF') along with the Citigroup, is raising a fund for investments as project equity. IDFC and Citi have each invested US$ 100 million in this fund. As of March 31, 2008, the HE had achieved a soft first close of US $ 522.5 million.
During 2007-08, IDFC, as a consolidated entity, generated asset management fees worth Rs.492 million. This will significantly increase as the quantum of funds rise overtime.
IDFC Global Alternatives
IDFC Global Alternatives (IDFC-GA), based in Singapore, is a global emerging markets private equity fund-of-funds business. IDFC-GA will focus mainly on Asia and the Commonwealth of Independent States (CIS), with a smaller allocation to other emerging markets. It will focus its manager selection on those that provide expansion and buyout capital to middle market companies. It will commit to both established and first generation managers as well as consider making allocations to managers investing in frontier markets in Asia and CIS.
Standard Chartered Mutual Fund, India
IDFC acquired this business in March 2008.This transaction was subject to certain regulatory approvals and is now completed. As of now, IDFC has not internalised the operations of this business with its own operations. As of March 31, 2008, assets under management of this business were Rs.127,335 million.
The Company brings with it seven years of experience, suite of high quality funds with an established track record and staff strength of 65 professionals with deep domain knowledge. While 60% of asset under management are from institutional investors, the rest comes from retail investors. This business should provide a good platform for IDFC to promote its AMC business.
OUR PEOPLE
IDFC prides itself on having one of the best talent pools in India that specialises in the infrastructure finance domain. In addition to regular implementation of Company's objectives, many of them also provide thought leadership to the industry in their specific area of expertise.
In 2007-08, the Company added 131 new employees across the domains of project finance, private equity, investment banking and asset management. These employees bring with them expertise to consolidate and sustain the IDFC's business growth. During the year, the campus recruitment program was redesigned, based on the feedback from earlier batches. There are sixteen fresh MBAs from the top business schools in the country participating in the Company's analyst program involving exposure to various verticals.
As an addition to the variable compensation system, the Company has employee stock options to high performers with an objective to create a core long-term talent group within the IDFC group. This also ensures that performing employees see long term benefit in participating in the growth of the organization. A Hewitt study for fixed compensation benchmarking has been concluded and appropriate changes to salary structures were done.
To nurture key talent at senior levels, IDFC has approached Oxford University's Said Business School to design, develop and deliver a programme for its senior executives. The core objective of the programme is to create a platform for dialogue between senior executives from IDFC and leading thinkers and executive education specialists. The programme called Leadership Excellence in 21st Century' comprises 6 modules and an inter-module project on a leading organizational dilemma. IDFC has also tied up with ISB, Hyderabad, to run training diagnostics and devise programs in areas like leadership, knowledge and managerial excellence. This program addresses talent across levels and functions and covers the whole length and breadth of the organization.
The other important focus area for human resource management at IDFC was the integration of the investment banking arm. This integration process has been completed successfully. IDFC, alongwith IDFC-SSKI had 367 employees as on March 31, 2008.
TABLE 2 ABRIDGED CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR IDFC:
Rs. MILLION 2007-08 2006-07
OPERATING & OTHER INCOME 13,236 7,158OF WHICHNET INFRASTRUCTURE BASED INTEREST 5,650 3,920NON-INTEREST INCOME 6,180 2,670NET TREASURY & OTHER INCOME 1,406 568OPERATING EXPENSES 2,532 821OF WHICHSTAFF EXPENSES 1,677 480OTHER EXPENSES 782 297DEPRECIATION AND AMORTISATION 73 44PRE PROVISIONING PROFIT 10,704 6,337PROVISIONS AND CONTINGENCIES 700 175PBT 10,004 6,162PROVISION FOR TAX 2,480 1,241OF WHICHCURRENT TAX 2,485 1,293DEFERRED TAX -113 -63FRINGE BENEFIT TAX 108 11SHARE OF PROFIT OF MINORITY INTEREST -113 -DILUTION EFFECT 13 -SHARE OF PROFIT OF ASSOCIATES (EQUITY METHOD) -2 118PAT NET OF MINORITY INTEREST 7,422 5,039EPS: BASIC (IN RS.) 5.95 4.48EPS: DILUTED (IN RS.) 5.93 4.45
INFORMATION TECHNOLOGY (IT)
IDFC continues to leverage IT to provide services of high standard to its customers. By and large the use of IT at IDFC is to streamline the Company's back office functions and integrate businesses across tasks, departments and geographies. Much of 2007-08 was spent in aligning the IT backbone including infrastructure, application and compliance with the needs of IDFC's rapidly growing businesses and acquisitions.
IDFC completed work on developing a remote state-of-the-art Data Recovery Site, which allows for instant recovery of data. This was completed in June 2007 and all server consolidations and backups are in place. The Company also implemented the concept of virtualisation, which addresses critical issues with adequate redundancy and meets most global standards for disaster recovery sites.
On the application front, the core software for project financing has been revamped with improved functionalities and a completely rebuilt code. The entire revamping project was managed in-house with specialised work being outsourced to vendors. The new product has been showcased in March 2008. It is under testing, and will go live in second quarter of FY 2008.
There was seamless integration with SSKI on the IT front during 2007-08. This was done through detailed gap analysis, and the integration was carried out to the extent necessary for optimal functioning of the Company.
Recognising the need for constant monitoring of IT security and processes, the Company subjects itself to IT audits each year. A reputed external agency undertakes an annual audit of IT infrastructure and applications. This was extended to all subsidiaries in 2007-08. This external audit is in progress and will also cover networks and control access across the Company. It is a matter of pride that in the half yearly ISO surveillance audits, there has been no non-conformity in the last three years.
An information security campaign was undertaken in July 2008 to create awareness within IDFC on issues related to IT security including password control, tracking and shoulder surfing.
FINANCIAL REVIEW
The abridged consolidated profit and loss accounts of IDFC for 2007-08 are presented in Table 2.
IDFC recorded a strong financial performance during 2007-08. IDFC's operating and other income grew by almost 85% in 2007-08 to Rs.13,236 million. Revenues (net of financing costs) from direct infrastructure lending activities grew by 44% to Rs.5,650 million in 2007-08. Non-interest income, which includes fees, capital gains and dividends, increased by 131 % to Rs.6,180 million in 2007-08.
Significant growth in operating income was also accompanied by an increase in operating expenses of 208% to Rs.2532 million. Manpower expenses witnessed a sharp rise-increasing almost 3.5 times from Rs.480 million in 2006-07 to Rs.1,677 million in 2007-08 due to the following factors viz. hiring new people, the additional manpower costs of the new acquisitions and the internal salary revisions that were carried out to align
IDFC's remuneration structures with the top half of the industry.
Expansion in lending activities has been accompanied by an increase in provisioning, to Rs.700 million. IDFC maintains very strict provisioning standards that go beyond stipulated norms. IDFC has 0.03% net NPAs; and its gross NPAs were only 0.17%.
There has been a robust growth in profits. The Company's Profit Before Tax (PBT) grew by 62% to Rs.10,004 million in 200708. Profit After Tax (PAT net of minority interests and associate companies) increased by 47% in the same period, to Rs.7,422 million.
Growth, however, has resulted in a slight decline in profitability ratios, as Table 3 shows. In part, this is a natural shortterm outcome of being in
an accelerated growth phase. Moreover, higher profits and capital raising during the year have significantly increased the Company's reserves and surplus: the total equity base has almost doubled from Rs.29,476 million in 2006-07 to Rs.55,933 million 2007-08. The Company's leverage ratio has decreased from 5.1 in 2006-07 to 4.0 in 2007-08. This has led to a small, albeit temporary, decline in Return On Equity (ROE) from 17.7% in 2006-07 to 15.6% in 2007-08.
RISK MANAGEMENT
IDFC has well-established systems and procedures for risk management which function under the close oversight of an in-house expert committee called the Risk Group. This group is actively engaged in areas of loan portfolio assessment, asset-liability management, and loan pricing. In addition, it focuses on developing various market risk modules.
Regarding portfolio review, the Risk Group comprehensively examines the entire project assets and equity investments on a semi-annual basis. Each credit is analysed individually and then integrated at the portfolio level. The overall portfolio risk report is regularly presented to an independent committee of the Board of Directors.
2007-08 2006-07
PBDT TO TOTAL INCOME 35.9% 39.5%PBT TO TOTAL INCOME 35.6% 39.2%PAT TO TOTAL INCOME 26.4% 32.1%ROE 15.6% 17.7%
The Risk Group also closely focuses on Asset Liability Management (ALM). To further enhance the effectiveness of the current process of regular monitoring of liquidity and interest rate risks, IDFC has sourced a sophisticated software-based ALM system. This will enable the Company to capture data from various disparate platforms, and allow for a more detailed and comprehensive analysis.
Given the rising volatility of interest rates as well as introduction of new products in the treasury portfolio, IDFC has also in creased the level of monitoring of market risk. This involves measuring interest rate risk on a regular basis as well as testing newer models for analysis.
With the regulatory framework for banks and financial institutions currently in transition to a Basel II environment, the risk measurement and monitoring frame work is being accordingly enhanced. IDFC has initiated efforts to align the capital allocation to different asset categories along the Basel II framework suggested under emerging regulatory guidelines.
The Risk Group works in close coordination with the Credit Policy Committee of the Board of Directors through presentations and deliberations on significant issues in risk management. Feedback and advice from the Credit Policy Committee are incorporated in various applications.
INTERNAL CONTROLS AND THEIR ADEQUACY
The Company has a proper and adequate system of internal controls to ensure that all assets are safeguarded and protected against loss from unauthorised use or disposition, and that the transactions are authorised, recorded and reported correctly.
Internal controls are supplemented by an extensive programme of internal audits, review by management and documented policies, guidelines and procedures. These controls are designed to ensure that financial and other records are reliable for preparing financial information and other reports, and for maintaining regular accountability of the Company's assets.
CAUTIONARY STATEMENT
Statements in this Management Discussion and Analysis describing the Company's objectives, projections, estimates and expectations may be forward looking statements' within the meaning of applicable laws and regulations. Actual results might differ substantially or materially from those expressed or implied. Important developments that could affect the Company's operations include unavailability of finance at competitive rates-global or domestic or both, reduction in number of viable infrastructure projects, significant changes in political and economic environment in India or key markets abroad, tax laws, litigation, exchange rate fluctuations, interest and other costs.
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