IndusInd Bank - No surprises; Current valuation factors in positives - BRICS

IndusInd Bank (IIB) reported healthy Q2FY13 results. Should IIB continue to meet its steep phase-2 (FY11-14) guidance, the stock will continue to deliver nominal returns and if this 2-year window till FY14 were the investment horizon, investors may choose to ride the stock. Beyond FY14, we believe there has to be a change in either its business model or our expectation. IIB is operating a very tight model with branch breakeven at 1-year - out of the 260 odd branches set up since 2008, only 7 (that have been operational for over a year) are yet to achieve breakeven - as against a breakeven period of 2.5-3 years on average for its competitors. More importantly, when revenue growth seems to be tightly coupled with branch breakeven and breakeven period, the revenue momentum is very likely to plateau in the absence of continued expansion in branches at a similar pace, as witnessed in the last few years, which in itself is a daunting task. We maintain Reduce on IIB, owing to a low probability that the reported earnings will continue to outpace management's steep guidance, as well as considering the stock's heady valuation of 2.9x Q2FY14 book. We are raising our price target from Rs330 to Rs335.

Marginal change in estimates: We keep NIM for FY13-14 almost unchanged in the range of 3.25-3.30%, as lower yield on assets is likely to offset gains from lower cost of funds. We pencil in credit costs at 69bps and 75bps for FY13-14 (as against 57bps in FY12) - normalised credit costs should be around 100bps, although management expects 75bps in a worst-case scenario, based on historical experience. We expect the expense ratio to continue hovering in the range of 49-50%, as IIB continues to open newer branches. We raise our EPS estimates for FY13 and FY14 by 2.4% and 0.6% respectively. We estimate IIB to record a CAGR of 22.4% in the PAT over FY12-14.

Valuations appear pricey: At 2.9x forward book and 15.7x 12 month rolling earnings, we believe that the stock's valuation is steep and factors in the positives. We value the stock at 2.7x forward book and 14.8x forward earnings with a price target of Rs335.

Source : Equity Bulls

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