Anusha Raheja [email protected]+91 22 6635 1220 May 14, 2018 Buy Indusind Bank Industry: BFSI Stock Idea In a sweet spot!!! Indusind Bank finds itself in the sweet spot currently in the wake of CV cycle recovery & surge in market share in the corporate loans. We expect strong credit growth of 30% CAGR over FY18-20E, which shall be nearly >2x of industry growth. Also, sizeable synergies of merger will start accruing within next 2 yrs strengthening its rural franchise – which will be long term ROA/ROE accretive. More importantly, the bank has strengthened its balance sheet by acquiring core banking relationships with the large corporates & by adding better rated borrowers. Also, margin could potentially surprise positively given the rising interest rates & potential for SA rates to move down Valuations - Return profile is likely to improve for better – we estimate ROE to improve to 18% in FY20E from 16% in FY18. We expect net profit to grow at strong CAGR of 26% over FY18-20E. Since, bank has strengthened its balance-sheet by adding better rated borrowers to its assets, we are comfortable according better valuation multiples to the bank. We assign a BUY rating on the stock with a target price of `2270, giving upside potential of 20% from the current levels Strong visibility of asset growth - We expect CV cycle recovery to sustain for the next 2 yrs led by recovery in macros, ban on the overloading of CVs in the states like UP, Haryana, Rajasthan, good monsoon and introduction of BSVI emission norms beginning FY2020. Banks like Indusind & Yes Bank are lapping up this opportunistic demand to increase their market share in good quality rated corporate loans. Its share of AAA rated borrowers has improved considerably over the last 2 yrs from 30% to 36% of the total book. All these factors put together would result in credit to grow at strong rate of 30% CAGR over FY18-20E. Upbeat on margin outlook - We are upbeat on the margin outlook of the bank – margins could surprise positively than management guidance of 3.95-4% for FY19 driven by - rising interest rates, change in the portfolio mix more in the favour of high yielding retail assets, higher corporate credit demand (which earlier had got shifted to bond market), opportunistic demand coming from better yielding refinancing options in NCLT cases, potential for SA rates moving down – all these factors would work in the favour of margins trajectory moving up. Merger would be best fit into the bank’s product suite - Merger to give the bank direct access to 1 lac villages in 342 districts with a customer base of 7.3 mn. This low cost rural focused unique distribution model will leapfrog the rural strategy of the bank by multiple years. Other benefits could be better cross-sell opportunities, lower cost of funds & lesser requirement of capital boosting return profile of the bank. In our view, within 2 years itself sizeable benefits of synergies will start accruing & further strengthen the retail & rural inheritance of the bank. Branch network of merged entity would surge by >100% @2967 branches. Sustained strength in the asset quality will continue - Asset quality profile of the bank has largely remained unscathed despite market-wide chaos of ballooning NPAs. RBI divergence report on asset classification done in Q4FY18 was minimal at 0.9% of advances (Rs13.5 bn). Also, barring one-offs, gross slippages for Q4FY18 were similar to last quarter levels. As per mgmt, its exposure to sensitive sector like power, real estate & gems & jewellry doesn’t has much asset quality risks. On the whole, strong asset quality profile of the bank is likely to continue going forward as well – we estimate credit cost of 65 bps in FY19 vs, mgmt. guidance of 55-60 bps. Stock Data Current Market Price (₹) 1,898 1 year Target Price (₹) 2,270 Potential upside (%) 20 Full Market Cap (₹ bn) 1,139 52-Week Range (₹) 1,905 / 1,375 Face Value (₹) 10 Reuters INBK.BO Bloomberg IIB:IN BSE / NSE Code 532187 / INDUSINDBK Shareholding Pattern Financial Snapshot YE Mar FY16 FY17 FY18 FY19E FY20E PAT (`.bn) 22.9 28.7 36.1 45.1 57.1 yoy (%) 27.5 25.4 25.7 24.9 26.8 BV (`) 291.0 338.9 391.0 474.4 569.6 ABV (`) 285.6 331.6 378.5 456.8 540.4 P/ABV (x) 3.2 4.3 4.7 4.2 3.5 ROE (%) 16.1 15.0 16.2 17.1 18.0 ROA (%) 1.8 1.8 1.8 1.8 1.8 Gr.NPA (%) 0.9 0.9 1.2 1.3 1.5 PCR (%) 58.6 58.4 56.3 58.5 52.3 Relative Price Performance Promoter 16.8% FPI 52.1% MF 10.5% Public & others 20.7% 50 60 70 80 90 100 110 120 130 140 May-17 Aug-17 Nov-17 Feb-18 May-18 Indusind Bank S&P BSE Sensex
Dividend Payout ratio (%) 10.4 12.5 12.5 11.3 10.0
Effective tax rate (%) 34.1 34.2 34.2 34.2 34.2
IndusInd Bank
LKP Research 13
E) Breakdown of ROA (%) FY16 FY17 FY18 FY19E FY20E
Interest Income 9.4 9.0 8.6 9.0 9.3
Interest expenses 5.8 5.2 4.9 5.2 5.5
NII/avg assets 3.6 3.8 3.7 3.8 3.8
Non-NII/avg. assets 2.6 2.6 2.4 2.1 1.9
Total Income 6.2 6.4 6.1 5.9 5.7
Operating exp/avg. assets 2.9 3.0 2.8 2.6 2.4
Operating profit/avg assets 3.3 3.4 3.3 3.3 3.3
Provisions/avg. assets 0.5 0.7 0.6 0.6 0.6
PBT/avg. assets 2.8 2.7 2.7 2.7 2.7
Tax/avg. assets 0.9 0.9 0.9 0.9 0.9
PAT/avg. assets 1.8 1.8 1.8 1.8 1.8
Leverage 8.3 8.8 9.4 10.1 10.6
F) Growth Rates (%) FY16 FY17 FY18 FY19E FY20E
Interest Income 22.5 21.3 20.0 33.1 31.1
Interest Expenses 17.3 13.4 17.3 36.4 33.6
NII 32.1 34.2 23.7 28.7 27.6
Other Income 37.2 26.5 13.9 13.2 15.1
Total Income 34.2 31.0 19.7 22.7 23.1
Operating Income 33.7 31.6 22.1 26.7 26.9
Net Profit 27.5 25.4 25.7 24.9 26.8
Deposits 25.4 36.1 19.8 30.6 29.5
Advances 28.5 27.9 28.2 31.2 29.5
H) Other performance parameters FY16 FY17 FY18 FY19e FY20e
No. of branches (No.) 1,000 1,200 1,400 1,650 1,900
No. of employees (No.) 23,060 25,314 26,000 27,750 29,500
Business per branch (`) 1,814 1,997 2,119 2,352 2,645
Profit per branch (`) 22.9 23.9 25.8 27.3 30.1
Business per employee (`) 78.7 94.7 114.1 139.9 170.4
Profit per employee (`) 1.0 1.1 1.4 1.6 1.9
IndusInd Bank
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