Buy Indian Bank; target of Rs 375: Emkay Global Financial

Emkay Global Financial's research report on Indian Bank

Unwavering focus on margins, instead of chasing credit growth: Bank maintains clarity on achieving growth without compromising on margins; thus, it would avoid chasing growth in its corporate book. Consequently, bank guides for 13-14% credit growth in FY23 (lower than the system at 15-16%) and foresees maintaining a similar trend in FY24, based on macro conditions and focus on margins. Though current blended CoF is 4.3%, incremental CoF is >6% on TDs; hence, the bank would continue to focus on growing its RAM book (Retail – Housing/VF/Gold loans; Agri – Agri Gold loans and MSME) to support margins. Within Retail, the bank plans adding express PL as a new product, while maintaining its dominance in retail/agri gold loans as well as offering SHG loans. Bank logged its highest-ever NIM, of 3.7% in 3Q (due to interest recognition on NPA recovery + asset repricing), but believes that a blend of improving LDR (low at 71% now), growth in the RAM segment, repricing of the MCLR book (highest among PSBs at 56%) and repricing of the investment book will help protect margin, keeping it well above 3%.

Outlook

We expect the bank to report 0.8% RoA in FY23E and reach 1% by FY24E/FY25E, led by a healthy margin trajectory, improving fees (incl. PSLC) and normalization of credit cost (1.1-1.2%, from a high of >2%). Additionally, Indian Bank is one of the few PSBs to remain well capitalized, with CET 1 at 13.2% (including 9MFY23 profit), thus posing no risk of equity dilution for investors, unlike peers. The current MD & CEO’s term is till Sep-2024, post which he will be eligible for a 2-year extension before superannuation. We retain a BUY on the stock, with TP of Rs375/share (0.8x FY25E ABV).