Buy Indian Bank; target of Rs 221: ICICIdirect

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26 Aug, 2025 12:21

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Indian Bank is well placed among southern PSU banks to revive at a more rapid pace given its relative strength with strong low cost deposit (29.7%), ability to generate higher NIMs (2.47%), healthy capital base (13.1%) and better asset quality as on Dec’14. We forecast Indian Bank to grow its balance sheet at 12% CAGR in FY14-17E. With moderate incremental slippages, asset quality concern may recede from H2FY16E, thereby improving its RoE to 10.5% (conservative growth assumptions) in FY17E from a trough of 9.0% in FY14. We initiate coverage on Indian Bank with a BUY rating and a target price of Rs 221 (0.9x FY17E ABV).

Amid deteriorating asset quality, Indian Bank remains adequately capitalised with its capital adequacy ratio (CAR) at 13.06% (Tier I – 10.56%) as of December 2014 vs. banks now trailing with <8% Tier I. On ploughing back 9MFY15 profits, CAR was at 13.8% inducing confidence in Indian Bank’s ability to shore up balance sheet, going ahead. Capital infusion of Rs 280 crore by GoI in FY15 will strengthen CAR by 16-18 bps ruling out substantial dilution in near term. In addition, a higher GoI stake (81.5% as of December 2014) gives the bank an opportunity to strengthen capital ratios through additional capital raising activity.

With relatively lower exposure to stressed sectors (22% of total advances) and higher exposure to SEBs, which have been largely restructured, Indian Bank is well placed compared to peers. The management expects slippages to continue with its run rate in Q4FY15 and H1FY16 on the back of a gradual revival in economy. It is expected to improve from H2FY16E onwards. As a result, we expect asset quality concerns to recede in FY17E, after touching 4.6% in FY16E (vs. 3.7% in FY14 and 4.5% in Q3FY15). Higher provision cover (57.1% in Q3FY15) and superior CAR at 13.8% reduces our balance sheet concern. We expect the same to grow at 12% CAGR to Rs 265053 crore over FY14-17E.

"At the CMP of Rs 174, Indian Bank is trading at 0.7x FY17E ABV of Rs 245. Considering it is relatively better on NPA pressures, stronger capital position compared to peers (see Exhibit 39), aiding faster recovery, we expect Indian Bank to trade at a premium compared to peers. We have assumed two valuation approaches, two stage model and relative P/ABV. Hence, we initiate coverage on Indian Bank with a BUY rating, valuing at 0.9x FY17E ABV leading to a target price of Rs 221, with an upside of 27%", says ICICIdirect.com research report.

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