IDFC steps on the gas, but sees macro headwinds

Managing Director Rajiv Lall says the company would stick to its approach of financing the top 20 companies.

Though the view of the Mithi river from his cabin is breathtaking, Rajiv Lall doesn’t seem to have the time to enjoy the scenery. The managing director of Infrastructure Finance Development Corporation (IDFC) is in the midst of a massive exercise started last year, which could be his biggest challenge in the six years he has spent at the company.

About a year ago, IDFC decided to almost treble its loan book to Rs 1 lakh crore in two to three years. The company looks to be well on course to achieving this target. The loan book rose to Rs 47,554 crore in the last financial year from Rs 32,562 crore a year ago, a growth of 42 per cent.

IDFC had shifted to various other businesses in the last five years. However, the management figured fee income could not grow beyond a point if expansion of the core book was limited.

Lall says while everything is still on course, the hazy macro outlook has made things difficult lately. Environmental concerns, the lacklustre performance of the government in infrastructure development and rising interest rates have already slowed the growth of the infrastructure sector. The global investor community is clearly not satisfied with the kind of barriers that infrastructure developers are facing. “Foreign investors always believe in herds and right now, the herd is running the other way. The perception is we are not a business-friendly country for infrastructure,” says Lall. The feeling, he says, is wherever the Union government's intervention is required, progress is hampered. On the other hand, work on state highways has recorded progress in states like Gujarat, Madhya Pradesh and Rajasthan. In the development of ports, both container and bulk traffic has moved disproportionately to state level ports and the 12 national ports are seen losing market share.

Elephant hunting

IDFC is known to have a select group of borrowers, with around 66 per cent lent to the 20 top rated companies. This has resulted in near-zero per cent delinquencies over the last few years. And Lall prefers it that way. “Diversification of risk does not mean lending to 50 or 100 people and diversifying the risk. In infrastructure, in Tier-II or Tier-III companies, the risk escalates exponentially. We have, by design, chosen to concentrate on only 20 groups so far, even it means lower profits from our lending business. The core book should be safe, rather than an asset quality problem,” said Lall, explaining what he calls IDFC's “elephant hunting” approach. IDFC typically conducts 10-15 transactions a year. The strategy is to offer the borrower products through its private equity and investment advisory arm, which also generates fee income. The 'one firm culture', which IDFC has evolved over the last few years, is a key to the success of its 'elephant hunting' business model. Lall claims no other financial group in the country offers the entire bouquet of products to clients.

Rate hike fears

Currently, IDFC is concerned rising interest rates have led to investment decisions being postponed by infrastructure companies. Lall says a disproportionate burden to tackle inflation has fallen on the Reserve Bank of India, since the government did not cut down on its non-productive expenditure. “The situation is worse than what I had envisaged three months earlier,” he says. IDFC, which had grown its balance sheet by 42 per cent in the last financial year, now says in the current environment, even a 20 per cent growth would be decent.

Lall is, however, unwilling to accept the argument that IDFC has not carried out enough infrastructure financing, reeling out figures to prove his point. Today, IDFC is the largest financer of private infrastructure in the country and the seventh or eighth-largest project financier in the world. Since its inception, it has financed 23,000 mw of power generation capacity. It is also the largest financier of renewable energy in the country. “We have a balance sheet and equity exposure that is larger than Ireda's (Indian Renewable Energy Development Agency) in renewable energy,” he says. “We are almost half of the Power Finance Corporation's balance sheet size,” Lall says, adding IDFC's balance sheet, at $10 billion, is one-seventh of the total bank lending to infrastructure. “You must remember: What banks call infrastructure, is not necessarily that,” he says.

On allegations of IDFC focusing more on fee income generating businesses, Lall says the argument misses the woods for the trees. The investment bank and private equity businesses and, to a lesser extent, the mutual fund business, have all helped IDFC in the infrastructure business.

Source: Business Standard