IndusInd Bank -- A High growth mid-Cap banking Stock

Snapshot:

NSE CODE: INDUSINDBK
BSE CODE: 532187
CMP: 235.20
52 WEEK HIGH/LOW: 309.30/183.50
FV: 10.00
P/E: 19.10
BV: 71.83
P/BV: 3.31
EPS: 12.41
DIVIDEND (%): 18.00%

Company Overview: IndusInd Bank derives its name from the Indus Valley civilization. IndusInd Bank started its operations in 1994 and merged with Ashok Leyland Finance in 2004. It has representative offices in London and Dubai. Today, Bank has about 300 branches and over 550 ATMs across India. IndusInd Bank is one of the fastest private mid-sized bank with assets of over Rs. 410bn and loans over Rs. 250bn. Bank has presence in over 175 cities in India. It is one of the leading banks in auto loan. Recently, CRISIL has reaffirmed its P1+ rating of IndusInd Bank’s fixed deposits and certificates of deposit program. Credit rating agency ICRA Ltd. has upgraded Lower Tier II Bonds rating of the Bank to LAA- (pronounced L double A minus) rating with stable outlook from LA+ (pronounced L A plus) rating with stable outlook. ICRA has also upgraded the Upper Tier II Bonds rating of IBL to LA+ rating with stable outlook from LA (pronounced L A) rating with stable outlook.

Banking Sector Overview; Most of the Indian banks are well managed and have strong domestic operations. Currently, India has a saving rate of over 35% of GDP and banks played important role in using the savings for the growth of the economy. Banking has undergone big change in last many years. Now, most of the banks have wide networks of Branch and ATM. Consumer & manufacturing sector also needs loans which are provided by bank. Due to recent rising rates, Banking stocks were volatile and corrected sharply. Historically data suggests that Loan Growth has limited relation with interest rates and its more related with economic growth. India’s GDP growth is 8%+ and Indian growth prospect is directly proportional to Bank and Finance. Hence, the future of Indian Banks is very positive.

INVESTMENT THESIS

Strong Q4FY11: IndusInd Bank posted excellent results for the quarter ended Mar,11. Interest earned for the quarter was Rs 1,048.84 crore compare with 720.21 Crore for Q4FY10 and net profit was Rs 171.76 crore compare with net profit of Rs 97.96 crore in Q4FY10. Loan Growth was 26% CAGR in last 3 Years. Going Forward, Further Growth of 26% CAGR is expected. CASA mix has improved in this Quarter while core fee income grew 47% YoY. Although CASA ratio of 27% is low compared with its peers but Bank is improving its numbers slowly and steadily. Deposits grew strongly by 28.7% YoY and 12.1% QoQ.

Improvement in Asset Quality:  IndusInd Bank has improved its asset quality in last few quarters. In Q4FY11, Advances grew 27.3% YoY (4.7% QoQ), Industry grew ~21% in the same period. Deposit growth (28.7% YoY, 12.1% QoQ), Industry grew ~17% in the same period. The net NPA level is down to 0.28% in Q4FY11 from 0.36% in Q3FY11. Due to slippages in various loans, Gross NPL declined 13% qoq to 2.7 bn (1% of loans) while net NPL declined 20% qoq (0.3% of loans). Provision coverage improved to 72.6% v/s 70.3% in the previous quarter. The restructured asset proportion is also low at 0.28%. The Bank has already reached the coverage ratio of 70% on standard assets as stipulated by RBI before Q4FY11. CASA ratio is low compare with its peers, but bank will improve the ratio with aggressive expansion of its branch. Currently, Bank Asset is stable and going forward, Bank is expected to further improve its NPA positions.

Expansion & Diversification: Currently, IndusInd Bank has about 300 branches in over 175 cities. As per management, Bank is planning to double its branch in next 3-4 years. This will help the bank to acquire more business on both asset and Loan. Once, Expansion will roll-out in next few years, CASA ratio is also expected to improve substantially. After the merger of Ashok Leyland Finance, Bank is well placed in vehicle loan with exposure of over Rs. 250 crore which is expected to grow 30% CAGR for next few years. Recently, IndusInd Bank acquired Deutsche Bank’s loss-making credit card business in India. It has 2 lac card customers and portfolio is about Rs. 2.5 bn. Although deal looks to be on expensive side but management is hopeful to be in profit in next 1 year. This transaction will help bank to increase its revenue and will maintain the high credit growth. Bank is also focusing on Home Loan, Loan against Shares and Property. These expansion and diversification will help bank to improve its number in FY12-13.

VALUATION: The first growth cycle (FY08-11) is completed which helped bank to improve its growth prospects. Going Forward, In Next 3 years, Bank is expected to post high profitable result  At the Current Market price of Rs. 235, IndusInd Bank trades at P/E ratio of 19 for the FY11. Stock is trading at 2.4 its estimated FY13 adjusted book. This is on higher side and not cheap. Since, Bank is growing on all financial parameter and High growth for FY12-13 justifies this premium. We expect bank to grow its earnings by 27%-30% CAGR for next 3-4 years. In FY12-13, ROA is expected to be around 1.6%. Long term investor who is looking to Buy a Mid-Cap Banking Stock can Buy IndusInd Bank @ CMP: 235 and add more on Decline till 210. Accumulate in Systematic way for 18 months time-frame. Target 320 in 18 Months. (Capital Appreciation of 50%).

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