Accumulate IndusInd Bank - Fairwealth Institutional Research

After achieving the set target for Planning Cycle I successfully, IIB moved further with aggressive plans and targets for second phase. Guidance for FY11-14 remains aggressive like the previous phase of planning cycle. As a part of the Phase 2 strategy (spanning over FY11-14), management expects bank's loan book to grow at 25-30%. Consumer finance division is likely to reach at Rs 25000cr, entirely funded by CASA. Hence, to ramp up CASA, bank plans to leverage its branch network with expected 350 new branches in the period of FY11-14.

Investment Thesis:

- Strong loan growth to continue: IIB loan book has been strong with 27% CAGR growth during FY08-11. After a dismal loan growth of 3% in FY06, it improved to 19% and 15% in FY07 and FY08 respectively. We expect loan growth of IIB to pick up in FY13. However, management aspiration to maintain profitability, margins and RoA may lead to a moderated credit growth in FY13 and FY14. We expect loan book to grow at a 26% CAGR during FY12-14.

- CFD book expected to reach at ~ Rs. 25000cr by FY14: The bank does not have any plan as of now to restructure the home loan share in CFD portfolio. However, it would continue to originate and distribute more home loans (HDFC Bank loan product), and thereby earn fee income. Overall, the bank targets to grow its consumer loan book to Rs 25000cr by FY2014.

- Liability Franchise to improve: The bank expects to open 285 branches by FY2014. Going forward, we expect CASA to strengthen further to 33% by FY14, largely driven by SA deposits accrued from the various initiatives taken such as hike in saving rates, credit card, LAP, mortgages etc.

- Asset Quality to remain strong, marginal pressure can not be ruled out: Progress in asset quality has been on account of continuous focus to lower credit risk and lower defaults in vehicle loans due to high replacement cost of vehicle and less exposure towards distressed sectors. Going forward, we believe asset quality remains prudent and is anticipated to remain firm in the long run.

- Q2FY13 Results: IIB posted better than expected numbers in the second quarter of FY13. Advances grew 31% (yoy) and 6% (qoq) to Rs 39427cr in Q2FY13. CASA improved to 27.98% as compared to 27.70% a year ago. The growth in CASA was largely driven by CA (8.6%, QoQ) while SA deposits moderated to 3.4% this quarter. Asset quality remains strong with Net NPA at 0.29, down 2bps from Q2FY12 while Gross NPA improved 6 basis points to 1.03%. IIB's corporate loan book is not exposed to highly distressed sectors which help in maintaining strong asset quality. PCR Ratio at 72.09% is comfortable as per RBI norms. Reported NIMs declined by 10 bps (YoY) but improved 3 bps sequentially.

Valuation: RoA and RoE of IIB continue to remain one of the highest in the industry. We expect IIB to deliver an impressive 30% earnings CAGR during FY11-14E. At CMP of Rs 363, IIB trades at 3.1x FY13E and 2.6x FY14E ABV. It trades at 14.8x FY13E and 11.8x FY14E EPS. IIB is currently trading at 18.6x of its earnings, which is below its 5-year average PE of 20. We recommend ACCUMULATE on IIB with the target price of Rs. 412, implying potential upside of 13%.

Source : Equity Bulls

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