Buy Induslnd Bank - BP Wealth Diwali Picks 2012

IndusInd Bank (IIB) commenced its operations in 1994 and caters to the need of both consumer and corporate customers. IIB has a robust technology platform supporting multi-channel delivery capabilities and currently has 441 branches, and 796 ATMs spread across 303 geographic locations of India.

Loans to grow more than industry average

IndusInd Bank is poised to register credit growth of ~25% in FY13 on the back of diversification and new additions to its loan book. The bank has been able to diversify its loan book over the last three years as it has been focusing more on working capital loans as against retail loans. In retail loans it has further diversified its portfolio by offering new products like credit cards, second hand vehicle financing and loans against property. We believe diversification and new additions to the bank's loan portfolio would help IIB beat the industry average credit growth in FY13.

Branch expansion to reap benefits going forward

The bank has guided that it is going to add ~110 and ~115 branches in FY13 and FY14 respectively and increase the number of ATMs to 940 by FY13 end. This expansion would help the bank garner more market share in savings deposits and also help it to increase its retail term deposit base. The bank's focus, we believe, is to improve its SA deposit per branch which was Rs 117 mn per branch in FY12 which if compared to larger private sector banks average level of ~Rs 300 mn is quite low.

NIMs to improve going forward

We believe IndusInd Bank's NIMs to improve in FY13 on the back of two major factors: 1) higher share of CASA in the overall deposits going forward and 2) increase in share of high-yielding credit composition (used CV vehicles) in the loan portfolio. We expect the net interest income to register robust growth going forward on the back of better yields along with low cost of deposits.

Better Asset Quality

The bank as significant exposure to retail loan and very little exposure to project financing due to which it has much better asset quality than most of its peers. The bank does not have any significant exposure to one particular segment as it has a very diversified loan book which enables the bank to have low concentration risk to a particular segment. The diversified loan book helps the bank keep its NPAs low as stress in any one particular sector would have minimal impact on the overall NPAs.

Valuation & Outlook

The bank's fee income is expected to remain robust and we expect the bank's business to grow at ~24% CAGR over FY12-FY14 with improvement in margin. The bank's management is confident that it would not face any significant loan restructuring going forward and also it would not face any significant asset quality issues. We have a 'BUY' rating on the stock valuing it at ~3.2x its adjusted book value to arrive at a target price of Rs 440.

Technical Outlook

The stock on its weekly chart has given upward breakout of symmetrical triangle price pattern and is now expected to head towards 400-440 in long term while support comes @350-320. The breakout has come with an increase in volume which increases the reliability of the formation.

Source : Equity Bulls

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