Buy IndusInd Bank; target of Rs 1900: ICICI Direct

ICICI Direct's research report on IndusInd Bank

Business growth remained strong. Advances increased higher than our estimate at 32.4% YoY (highest in last several quarters) to Rs 163144 crore while deposit grew 18.9% YoY to Rs 168219 crore Margins stayed at strong levels of >3.8%. NII maintained healthy growth trend of 21% YoY to Rs 2203 crore Asset quality stayed steady QoQ. The GNPA ratio improved to 1.09% vs. 1.15% QoQ while the NNPA ratio fell 3 bps QoQ to 0.48% The bank made contingency provisions of ~Rs 275 crore towards exposure to an infrastructure company. This account is currently standard. Total provisions came in at Rs 590 crore vs. our estimate of ~Rs 315 crore. This impacted the bottomline PAT was at Rs 920 crore (up 4.6% YoY) vs. our estimate of Rs 1091 crore. Excluding contingent provisions, the traction in earnings would have been healthy at ~24% YoY.

Outlook

IIB has continued to deliver a strong performance. Consistent return ratios of ~17-19% RoE & ~2% RoA provide comfort. An improving CV cycle & consequent rise in high yielding vehicle portfolio augur well for future. Superior growth, strong liability franchise, stable margins and steady credit costs are seen enabling earnings growth at 28.3% CAGR in FY18-20E (earlier estimate of ~32% CAGR). The bank has announced an all-share deal to buy Bharat Financial (BFIL). This merger is expected to add ~Rs 8/ share to the standalone BV while warrant issuance to promoter can add ~Rs 25/share. We factor in higher provisions in FY19E for exposure to an infrastructure company. We maintain BUY rating but reduce the target price to Rs 1900 (earlier 2150), valuing the stock at ~3.6x FY20E ABV.