Buy Indian Bank; target of Rs 275: ICICI Direct

Among mid-sized PSU banks, Indian Bank is well placed with superior fundamentals given its relative strength with strong low cost deposit (33.6%), ability to generate higher NIMs (2.64%) and healthy capital base (14.3%). With relatively lower exposure to stressed sectors and higher exposure to SEBs, which have been largely restructured, Indian Bank is better compared to peers in asset quality terms. Adequate capital (Tier-I - 12.8%) will enable the bank to grow its balance sheet without any adverse dilution, which remains a key positive for long-term investors.

The demonetisation drive is expected to benefit banks in terms of higher deposits and treasury gains. Indian Bank, owing to healthy branch network of 2597 branches is expected to be one of the beneficiaries.  Treasury gains could positively impact FY17E PAT by 12-18%.

On a relative basis, Indian Bank ha s emerged as a strong performer with stronger CAR, healthy asset quality and better return ratios. Consequently, the bank is commanding a premium compared to peers.  With better earning visibility (PAT CA GR estimated at 51% to Rs 1621 crore in FY16-18E), premium valuations are expected to sustain ahead. Therefore, we remain positive on the stock maintaining our growth projection. We maintain our target price at Rs 275/share, valuing the stock at a target multiple of 1.1x FY18E ABV. However, with the recent correction in the stock price, we upgrade the stock from HOLD to  BUY. For all recommendations, click hereDisclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.