IndusInd Bank - Strong business model with able drivers... - ICICIdirect

IndusInd Bank (IIB) augmented itself from low and volatile B/S growth to steady and sustainable growth with strong profitability. The bank earns one of the best RoAs in the industry at ~1.6%. Strong management pedigree remains a key strength of the bank that has driven a sharp improvement in all core parameters since it took over in FY08. We like the fact that the transformation has been a qualitative one (RoA up from 0.3% to 1.6% as on FY13) despite the turbulent economic scenario. We believe IIB is well set for another phase of healthy business and PAT growth. Earnings visibility remains healthy (though lower than previous trends) at 26% CAGR over FY13-15E to Rs. 1673 crore despite factoring in lower NIM, business growth combined with higher credit cost than indicated by the management.

Business model provides comfort

IIB has developed a sound business model over the years wherein it has a high yielding and well diversified asset portfolio on the one side and an improving liability franchise on the other. The asset book is evenly divided between consumer finance (CF) (~80% of which is the high yielding vehicle finance) and corporate banking (CB) (working capital in nature and well diversified across industries). Further, the CASA franchise has doubled to 30% over FY08-13. IIB has managed to deliver superior business growth (25% CAGR in five years) along with impeccable asset quality (GNPA at ~1% in the past three years) and strong margins (3.6%+ in FY11-13).

Visibility of sustained growth in earnings high, new management key

IIB's management under Mr Sobti has displayed strong execution capabilities as evidenced by successful accomplishment of planning cycle I (FY08 -11) and Planning cycle II (FY11-14) till now. We believe IIB is well positioned to tread Planning cycle III (2014-16) but considering current weak economic outlook, we have built in conservative estimates than guided. We anticipate advances CAGR of 21% in FY13-15E to Rs. 65100 crore, NIMs to moderate to 3.6% from 3.7% levels (owing to rise in short-term rates) and credit cost to rise 10 bps to 70 bps (concerns on CV portfolio seen). Overall, PAT is likely to grow at healthy 26% CAGR over FY13-15E.

Valuations pairing with premium players; initiate with BUY

At the CMP of Rs. 407, IIB is trading at 2.2x FY15E ABV of Rs. 188. Considering the management stability and consistent growth that the bank is demonstrating, we value IIB at 2.4x FY15E ABV (last one, three year average at 2.6x, 2.4x), a discount of 23% to HDFC Bank. We arrive at a target price of Rs. 460, providing an upside of 13%. We remain positive on the business model and initiate coverage on IIB with a BUY rating.

Source : Equity Bulls

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