INDUSIND BANK LTD - Initiating Coverage, CMP Rs.417, HOLD, Target Rs.475

INDUSIND BANK LTD. (IIB) - CMP Rs.417, HOLD, Target Rs.475

STRENGTH: Impressive Business Growth, Healthy NIM's, Better Asset-Liability Management, Fine Balance between Corporate & Retail Exposure, Stable Asset Quality & Return Profile WEAKNESS: Higher Exposure to CV Segment OPPORTUNITIES: Aggressive Branch Expansion, Innovative Products THREAT: Interest Rate Volatility, Prolonged Economic Slowdown may led to Higher Slippages.

Strong Growth Momentum to Continue

Higher focus on niche segments, aggressive branch expansion coupled with innovative & focused approach towards newer segments has led to strong advances growth (5-year CAGR - 28%) over the last couple of years. Favorable advances mix (~51:49 Corporate/Retail) not only helps maintain margins but also mitigates slowdown risk in any particular segment. Considering the overall slowdown especially in CV segment (~25% exposure), we expect advances to grow at a slower pace of ~24% over FY14-15E. However, management anticipates CV cycle to bottom out over the next 1 year & with likely revival in economy, we expect IIB to be back on high growth trajectory from FY16 onwards.

Improving CASA & Strong Core-Fee Income to Result in Healthy Bottom-line Growth

Aggressive branch expansion along with focused strategy to increase share of low-cost deposits has led to remarkable improvement in CASA from 19% to ~29% during FY09-13 which is further expected to improve to ~33% by FY16E. Branch network has more than doubled since FY10 from 210 to 560 branches in H1FY14 which is further expected to reach ~850 by FY16E. Better advances mix along with seasoning of existing branches would not only help improve CASA going ahead but also maintain stable NIM's (Mgmt guidance 3.4-3.7%). Greater emphasis towards core-fee income generation has resulted in significant contribution to the bottom-line. Non-interest income has grown at a CAGR of ~34% over FY10-13 forming ~35% of net total income. Healthy advances growth, stable NIMs along with high core-fee income growth to result in healthy growth in profits which we expect to grow at a CAGR of ~22% over FY13-16E.

Strong Fundamentals with Healthy Asset Quality & Robust Return Ratios

Prudent risk management, well diversified credit portfolio along with low slippages has enabled the bank to maintain healthy asset quality over the last couple of years. However considering the stress in the economy (majorly CV segment), we have factored in higher slippages & credit cost for FY14-15E leading to higher NPA's which we expect to pick out in FY14-15. Also the restructured book is amongst the lowest in the industry at ~0.3% of the total gross advances. Strong credit growth, stable NIM's & healthy asset quality has led to better return ratios with sustainable ROE & ROA's at ~17%+ & ~1.5% over the last many years.

OUTLOOK & VALUATION

IIB has emerged as one of the leading private sector bank over the last couple of years. Strong advances growth, gradual improvement in NIMs coupled with healthy asset quality over FY09-13 has led to significant re-rating in the stock. With focused approach & well-defined management strategies, we expect IIB to maintain strong growth run-rate going ahead. Lower corporate bond exposure along with higher focus on core-fee income generation offers further impetus to profit growth. Despite current slowdown, we expect advances & deposits to grow at a CAGR of ~24% & 19% resp. over FY13-15E. Minimal exposure to stress sectors & lower restructuring book is likely to keep asset quality intact. Hence considering the above investment arguments & strong growth prospects, we recommend 'HOLD' on the stock with a price target of Rs.475 based on forward P/ABV of 2.2x (5 year avg).

Source : Equity Bulls

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