IndusInd Bank: Premium valuation justified by robust earnings outlook

India Infoline News Service | Mumbai |

We expect Indusind Bank’s loan growth to slow down to 25% pa over FY13-15 from 30% pa over FY11-13.

CMP Rs452, Target Rs530, Upside 17.3% 
 

Loan growth to moderate but remain firm 

We expect Indusind Bank’s loan growth to slow down to 25% pa over FY13-15 from 30% pa over FY11-13. Trends in recent quarters already mark a deceleration in credit growth; more so in consumer financing segment (50% of advances). The latter in turn is driven by slowing disbursements across vehicle financing products (92% of CF book) due to weakened market volume growth. 

 

NIMs in a dream run - cyclical and structural support

Bank’s NIM hit an all-time high of 3.7% in Q4 FY13 driven by material decline in wholesale funding rates. Indusind’s CASA ratio has been improving driven by robust branch additions and higher savings rate offered. The equity capital raise of Rs20bn in November 2012 has also aided margins. While cost of deposit would continue to trend down, the decline in lending yield would be much slower due to fixed rate nature of consumer financing book. We see incremental margin improvement over the next couple of quarters.

 

Asset quality may normalize slightly; profitability to stay robust 

Bank’s asset quality has held-up extremely well despite stress in the economy. On consumer financing side, delinquencies remain fairly under control but the trend shows an uptick in the past three quarters. A conscious disbursements deceleration in CV and equipment financing products also indicate that delinquencies could have troughed. We expect IndusInd’s asset quality to normalize a bit in the current year and consequently factor a higher credit cost of 60bps. Better NIMs should provide enough headroom to accommodate higher credit cost and deliver a robust 27% earnings growth over FY13-15. This would translate into an average RoA delivery of 1.7%, higher than 1.6% in FY13.

 

Relative valuation premium justified by superior earnings visibility 

A diversified and granular credit profile, robust NIM trajectory and resilient asset quality underpin a relatively strong and predictable revenue and earnings growth outlook for Indusind Bank. Near-term performance outlook is very strong with margin expected to expand further. Recent correction in the stock has lowered valuation to a reasonable level of 2.4x FY15 P/adj.BV. Retain BUY with 9-month target of Rs530.


Financial summary
Y/e 31 Mar (Rs m)
FY12
FY13
FY14E
FY15E
Total operating income
27,160
35,958
47,418
59,101
Yoy growth (%)
29.9
32.4
31.9
24.6
Operating profit (pre-provisions)
13,730
18,395
24,761
30,100
Net profit
8,026
10,612
14,062
17,211
yoy growth (%)
39.0
32.2
32.5
22.4





EPS (Rs)
17.2
20.3
26.9
32.9
Adj. BVPS (Rs)
94.4
143.3
164.0
189.3
P/E (x)
26.5
22.4
16.9
13.8
P/Adj.BV (x)
4.8
3.2
2.8
2.4
ROE (%)
19.2
17.5
17.1
18.1
ROA (%)
1.6
1.6
1.7
1.7
CAR (%)
13.9
17.4
16.0
14.8
Source: Company, India Infoline Research
BSE 1,672.10 0.55 (0.03%)
NSE 1,670.10 [0.95] ([0.06]%)

***Note: This is a NSE Chart

 

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