IDFC’s second-quarter 2016 earnings results were disappointing, as the firm took a large exceptional charge on its profits, bringing down earnings per share, or EPS, to negative INR 9 per share for the quarter, and negative INR 8 per share for the past six months. Taking this into account, we lower our full-year 2016 EPS forecast to negative INR 1 per share, down from INR 9 per share. To do so, we adjust for exceptional items and move other income upwards, as the asset management, broking and investment banking businesses at the consolidated IDFC continue to perform well. Despite this change, our INR 90 fair value estimate for the firm and no-moat rating remain intact. This demonstrates the importance of a company's long-term outlook, compared with its short-term earnings estimates.
The INR 26.38 billion exceptional item is a one-time charge to the profit and loss statement by utilising its statutory reserves, for which IDFC has taken explicit permission from the Reserve Bank of India. INR 25 billion is for specific provisions against identified stressed assets, and INR 1.38 billion is for interest payments not received from potential stressed loans. We view this as a prudent measure by IDFC; however, the tax treatment for this adjustment has created an INR 8 billion deferred tax asset, which will affect future tax payments by the company and increases the unpredictability of earnings and taxes for IDFC in the future. We caution investors with our very high uncertainty rating on the stock.
The starting book value of the bank is as expected at INR 39; however, it is difficult to predict how the new franchise will develop and over what time frame, justifying our very high uncertainty rating. IDFC Bank performance will have a meaningful impact on the value of IDFC as a whole. Shares of IDFC continue to trade at a discount to our intrinsic value estimate. IDFC Bank lists on Nov. 6, but Morningstar will not be covering the bank independently.
In other news, IDFC has launched a 100%-owned infrastructure debt fund with initial capital of INR 4.4 billion, which it would like to increase to INR 6 billion with external capital. This will enable IDFC to carry forward its legacy of infrastructure lending by bringing in foreign investors to invest in Indian infrastructure. The fund is rated AAA by external credit rating agencies.
