The brokerage firm has issued a “buy” call on IndusInd Bank, setting a target price of ₹1,800, which implies an increase of 18 per cent.
Despite already recording a hefty gain of 24 percent over the past year and a 26 percent increase in year-to-date performance for 2023, with positive returns recorded in 8 of the 12 months to date, the stock continues to show strong performance. . December alone saw a 2.5 percent increase, marking the fourth consecutive month of gains.
The stock also hit its 52-week high of ₹1,538 on December 11, 2023. It has now surged more than 55 percent from its 52-week low of ₹990.25, reached on February 1, 2023.
IndusInd Bank is an Indian group promoted newer age private sector bank and is the fifth largest private bank in India. The bank has a full product suite with a strong moat in the vehicle and microfinance. The bank has a strong presence with a pan India branch network of 2631 branches (2903 ATMs) and a large customer base of 3.7 crores.
Revenues
The the private sector lender reported 22 percent year-on-year (YoY) increase in the September quarter standalone net profit to ₹2,181.5 crore on the back of higher revenue and lower provisions. The lender reported net interest income (NII) – the difference between interest earned and spent – of ₹5,077 crore in Q2 FY24, up 18 percent YoY. Its net interest margin (NIM), a key measure of profitability, was unchanged from the previous quarter, at 4.29 percent.
The bank also witnessed a slight improvement in asset quality compared to the June quarter. Its gross bad loans stood at 1.93 percent of its total advances, down 1 basis point from the previous quarter. Its net NPA ratio was at 0.57 percent, down 1 basis point from the June quarter.
Investment Rationale:
Focus on improving granularity on liabilities: According to the brokerage, the lender has strategically improved its structural framework with continued investments in distribution capacity, digital stacking and customer acquisition. Current Account Savings Account (CASA) remains stable at 40 percent, and the Liquidity Coverage Ratio (LCR) is approximately 117 percent. Future plans include scaling the branch network to 3250-3750 branches by FY26E.
In terms of liabilities, the bank is emphasizing digital initiatives and targeting wealthy clients, anticipating a minimal impact from recent increases in risk weight. Despite an expected increase in the cost of funds, the bank is using various strategies to maintain a constant margin of 4.2-4.3 percent, ICICI noted.
Retail segment to aid growth: On the retail front, the bank is focusing on key segments such as microfinance and auto finance, the brokerage said. Retail segments, including housing and Bharat Shop Super, are being expanded for improved growth and granularity. The brokerage estimates overall credit growth at 18-20 percent in FY24-26E, with a specific focus on the retail segment and 18.5 percent CAGR forward growth from FY23-26E.
Active quality constant: Asset quality remained constant with a low percentage of 0.5-0.7 percent. The bank has established an adequate supply buffer, expecting slippages at 1.5-1.6 percent. The annual credit cost for FY24E is estimated to be in the range of 110-130 bps, with healthy coverage and contingent provisions contributing to maintaining asset quality, the brokerage predicted.
In summary, the bank strategically aligns its focus on strengthening liabilities, especially in the retail segment, ensuring constant asset quality and effective management of credit costs. Key initiatives include digitization, expanding the branch network and targeting specific customer segments.
“Improving granularity in both assets and liabilities provides confidence in continued earnings performance as well as asset quality. Continued traction in growth with focus on new age segments, granular liability franchise and lower credit cost expected to keep RoA at 1.8-1.9 percent in FY24-26E .We assign a BUY rating on the stock with a target at ₹1800, assigning a PBV multiple of 1.75x FY26E ABV,” ICICI said.
Disclaimer: The opinions and recommendations made above are those of individual analysts or trading companies, and not of Mint. We advise investors to check with certified experts before making any investment decision.
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Published: 13 Dec 2023, 13:36 IST