In s titu tio n a l E q u itie s

IndusInd Bank
31 March 2020

Reuters: INBK.BO; Bloomberg: IIB IN

Mgmt commentary suggests a complete overhaul ahead BUY

Our key takeaway from the bank’s business update conference call last evening was that a
major overhaul maybe underway at IndusInd Bank. This would include ‘tweaks’ at the Sector: Banking
management level and pivoting the business strategy in a direction such that asset growth is
a function of liabilities (and not the other way). One of the elements of the overall plot
CMP: Rs412
includes de-focusing on bulk deposits. During the quarter, the bank lost about 10-11% of Target Price: Rs623
deposits, of which ~75% belonged to 1-2 state governments while rest were corporate in
nature. Assuming the liabilities strategy plays out on expected lines, we think historical high Upside: 51%
loan growth rates would be challenged. Over FY20E/21E/22E, we expect advances to grow at
nearly half the annual run-rate we were used to seeing before. Further, management
Raghav Garg, CFA
sounded confident about managing covid-19 impact on asset quality across different Research Analyst
Company Update

portfolios. The confidence is attributed to the fact that the bank has been able to manage [email protected]
previous disruptions well. However, we would wait over the next few months to see how long +91-22-6273 8192
the current health crisis lasts and what the underlying damage is to the economy and
businesses. For now, we are building an uptick in NPAs in FY20E and FY21E for the bank. Arjun Bagga
4QFY20 will see overall credit costs of 200-210bps, which in absolute terms could turn out to
Research Associate
be >Rs15bn (up 45% QoQ) (as per NBIE estimates) and could take PCR beyond 60%. Our
sense is that we could witness a couple or more quarters of weak growth and profitability as [email protected]
the new MD/CEO implements new growth strategy, aims for a higher coverage ratio and a +91-22-6273 8111
stronger balance sheet. We value the stock at Rs623, based on 1x FY22E ABV. Going
forward, new MD/CEO delivering on stated guidance (see business build-out philosophy on Key Data
page 3) may warrant upward revision of book value multiple.
Current Shares O/S (mn) 693.5
Other key conference call highlights:
 Once the lockdown is over, service-oriented industry, including banking, will bounce back faster. Mkt Cap (Rsbn/US$bn) 286.7/3.8
RBI and the government are taking measures to ensure the economy resumes functioning as soon 52 Wk H / L (Rs) 1,824,/236
and smooth as possible. Though services will normalize in 3-4 months, demand should recover post
Daily Vol. (3M NSE Avg.) 12,292,030
1QFY21.
 Given the current situation, bank’s experience suggests that asset quality impact on the portfolio will
be limited (see business segment wise asset quality implications in exhibit 1). Price Performance (%)
 The bank awaits clarifications from the RBI regarding freezing of DPD of clients. Meanwhile, the
1M 6M 1 Yr
bank would continue to support its customers through various measures.
 In CVs, 70% of the business is from repeat customers, which have been in the business for more IndusInd Bank (62.6) (70.1) (76.8)
than two decades and have seen far worse times.
 Two-wheeler finance is mostly income-generation oriented since these include people such as Nifty Index (26.1) (27.8) (28.8)
carpenters who use the vehicle for earning their livelihood. Source: Bloomberg
 The bank saw deposit outflow of 1-2 state government accounts (75% of the outflow) and some
corporate deposits which constituted about 10-11% of the total deposits. Since then, the lost
deposits have been made up for by tapping other resources such as 3-year refinance, FX
borrowings, CDs, repos and call money instruments. A significant part of the advances book also
qualifies for PSLC. Overall, the bank remains confident about its liquidity position.
 Retail deposits have been grown at 18-20% YoY.
 The bank has created an independent group to sharpen the corporate RoRWA. As per the
MD/CEO, large/chunky corporate exposures are on their way out.
 The bank will maintain 15% as threshold for CRAR.
 Current management team’s continuity is critical. There are likely to be some tweaks such as
consolidation of profiles, addition of control and/or governance in some businesses and splitting of
some business lines so as to gain more focus.
 Current health crisis could impact repayment inflows which should be made up for by the cut in
CRR.
 In MFI, both disbursements and collection have been impacted since centre meetings have not
been possible.
 Promoters have applied to the RBI for raising their stake to 26% and will continue to support the
bank.
Valuation and outlook: We have retained our NII, PPOP and PAT estimates for FY20/FY21/FY22. We
have retained Buy rating on IIB with a target price of Rs623, valuing the stock at 1.0x FY22E P/ABV.
 In s titu tio n a l E q u itie s

Exhibit 1:Covid-19 implication on select loan portfolios

Source: Company, Nirmal Bang Institutional Equities Research

2 IndusInd Bank
 In s titu tio n a l E q u itie s

Key priorities include management continuity, inculcating accountability, employee incentivization, deposit
retailisation, sharper focus on corporate RoRWA and strengthening the balance sheet.

Source: Company, Nirmal Bang Institutional Equities Research

3 IndusInd Bank
 In s titu tio n a l E q u itie s

Exhibit 2: Financial summary

Y/E March (Rsmn) FY18 FY19 FY20E FY21E FY22E
Net interest income 74,979 88,462 118,187 134,926 158,007
Pre-provisioning operating profit 66,570 80,882 104,438 117,285 136,936
PAT 36,066 33,011 49,054 58,674 73,033
EPS (Rs) 60.1 54.8 69.3 82.9 103.1
BV (Rs) 397.0 442.6 534.6 605.0 692.7
P/E (x) 6.8 7.5 5.9 5.0 4.0
P/BV (x) 1.0 0.9 0.8 0.7 0.6
GNPAs (%) 1.2 2.1 2.6 3.1 3.1
NNPAs (%) 0.5 1.2 1.1 1.2 1.0
RoA (%) 1.8 1.3 1.6 1.7 1.9
RoE (%) 16.2 13.1 15.2 14.5 15.9
Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 3: Change in our estimates

Revised estimate Earlier estimate % Revision
FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E
Net interest income (Rsmn) 118,187 134,926 158,007 118,187 134,926 158,007 0.0 0.0 0.0
NIM (%) 4.2 4.2 4.4 4.2 4.2 4.4 0 bps 0 bps 0 bps
Operating profit (Rsmn) 104,438 117,285 136,936 104,438 117,285 136,936 0.0 0.0 0.0
Profit after tax (Rsmn) 49,054 58,674 73,033 49,054 58,674 73,033 0.0 0.0 0.0
Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 4: One-year forward P/BV

(x)
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
Sep-13
Sep-09

Sep-10

Sep-11

Sep-12

Sep-14

Sep-15

Sep-16
Mar-17
Sep-17

Sep-18

Sep-19
Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-18

Mar-19

Mar-20

P/BVPS Mean +1 SD -1 SD +2 SD -2 SD

Source: Company, Nirmal Bang Institutional Equities Research

4 IndusInd Bank
 In s titu tio n a l E q u itie s

Financials
bit 1: Exhibit 5: Income statement Exhibit 4: Exhibit 6: Key ratios
Y/E March (Rsmn) FY18 FY19 FY20E FY21E FY22E Y/E March FY18 FY19 FY20E FY21E FY22E
Interest Income 172,808 222,612 281,877 309,662 351,278 Growth (%)

Interest expense 97,829 134,150 163,690 174,736 193,271 NII growth 23.7 18.0 33.6 14.2 17.1
Pre-provision profit growth 22.1 21.5 29.1 12.3 16.8
Net interest income 74,979 88,462 118,187 134,926 158,007
PAT growth 25.7 -8.5 48.6 19.6 24.5
Fees & Other Income 47,501 56,467 68,592 79,736 92,845
Business (%)
Net Revenue 122,479 144,929 186,779 214,662 250,852
Deposit growth 19.8 28.5 15.0 13.0 16.0
Operating Expense 55,910 64,047 82,341 97,377 113,917 Advance growth 28.2 28.6 14.6 10.2 15.2
-Employee Exp 17,807 18,535 28,637 32,932 37,872 CD 95.6 95.7 95.3 92.9 92.3
-Other Exp 38,103 45,512 53,704 64,445 76,045 CASA 44.0 43.1 43.7 46.0 47.9
Pre-Provisioning Operating Operating effeciency (%)
66,570 80,882 104,438 117,285 136,936
Profit
Cost-to-income 45.6 44.2 44.1 45.4 45.4
Provisions 11,757 31,076 37,240 38,875 39,338
Cost-to-assets 2.8 2.6 2.8 2.9 3.0
PBT 54,813 49,806 67,198 78,410 97,598
Spreads (%)
Taxes 18,747 16,795 18,143 19,736 24,565 Yield on advances 10.6 11.0 11.9 11.5 11.6
PAT 36,066 33,011 49,054 58,674 73,033 Yield on investments 7.1 6.7 6.4 6.5 6.5
Source: Company, Nirmal Bang Institutional Equities Research Cost of deposits 5.8 6.1 6.2 5.9 5.7
Yield on assets 8.6 8.9 9.4 9.2 9.2
bit 2:
Cost of funds 5.8 6.2 6.3 6.0 5.9
bit 3: Exhibit 7: Balance sheet NIMs 4.0 3.8 4.2 4.2 4.4
Y/E March (Rsmn) FY18 FY19 FY20E FY21E FY22E Capital adequacy (%)

Equity Capital 6,002 6,027 7,081 7,081 7,081 Tier I 14.6 13.7 15.2 14.8 14.4
Tier II 0.4 0.5 0.5 0.4 0.4
Reserves & Surplus 232,269 260,721 371,462 421,335 483,413
Total CAR 15.0 14.2 15.6 15.3 14.8
Shareholder's Funds 238,271 266,748 378,543 428,416 490,494
Asset Quality (%)
Deposits 1,516,390 1,948,679 2,240,981 2,532,308 2,937,478
Gross NPA 1.2 2.1 2.6 3.1 3.1
Borrowings 382,890 473,211 496,872 506,809 567,626 Net NPA 0.5 1.2 1.1 1.2 1.0
Other liabilities 78,560 89,444 90,387 86,117 92,402 Provision coverage 56.3 43.0 56.3 62.8 69.5
Total liabilities 2,216,256 2,778,194 3,206,894 3,553,763 4,088,111 Slippage 3.0 3.7 2.5 2.4 2.2
Cash/Equivalent 132,154 147,834 203,525 226,977 262,179 Credit-cost 0.7 1.4 1.4 1.3 1.2
Advances 1,449,537 1,863,935 2,136,210 2,353,742 2,711,097 Return (%)

Investments 500,767 592,662 672,294 759,693 881,243 ROE 16.2 13.1 15.2 14.5 15.9
ROA 1.8 1.3 1.6 1.7 1.9
Fixed Assets 13,386 17,099 19,402 20,342 21,282
RORWA 2.3 1.7 2.1 2.2 2.3
Other assets 120,412 156,664 175,463 193,009 212,310
Per share
Total assets 2,216,256 2,778,194 3,206,894 3,553,763 4,088,111
EPS 60.1 54.8 69.3 82.9 103.1
Source: Company, Nirmal Bang Institutional Equities Research BV 397.0 442.6 534.6 605.0 692.7
ABV 384.5 405.3 500.0 565.4 655.5
Valuation
P/E 6.8 7.5 5.9 5.0 4.0
P/BV 1.0 0.9 0.8 0.7 0.6
P/ABV 1.1 1.0 0.8 0.7 0.6
Source: Company, Nirmal Bang Institutional Equities Research

5 IndusInd Bank
 In s titu tio n a l E q u itie s

Rating track
Date Rating Market price (Rs) Target price (Rs)
14 October 2014 Buy 636 800
14 January 2015 Buy 821 975
17 April 2015 Buy 933 1,075
14 July 2015 Buy 927 1,150
12 October 2015 Buy 937 1,150
13 January 2016 Buy 908 1,335
22 April 2016 Buy 971 1,335
12 July 2016 Buy 1,124 1,340
13 October 2016 Buy 1,220 1,470
10 January 2017 Buy 1,162 1,470
14 February 2017 Buy 1,340 1,600
20 April 2017 Buy 1,420 1,700
12 July 2017 Buy 1,560 1,790
13 October 2017 Buy 1,747 2,065
12 January 2018 Buy 1,700 2,018
20 April 2018 Buy 1,834 2,165
11 July 2018 Buy 1,934 2,288
9 October 2018 Buy 1,600 2,274
16 October 2018 Buy 1,627 2,235
13 December 2018 Buy 1,582 2,139
10 January 2019 Buy 1,599 2,107
8 April 2019 Buy 1,768 2,109
23 May 2019 Buy 1,519 2,066
8 July 2019 Buy 1,533 1,846
15 July 2019 Buy 1,510 1,880
7 October 2019 Buy 1,241 1,768
11 October 2019 Buy 1,229 1,733
1 November 2019 Buy 1,313 1,733
8 January 2020 Buy 1,459 1,729
15 January 2020 Buy 1,482 1,736
27 March 2020 Buy 413 623
31 March 2020 Buy 412 623

Rating track graph

2500

2000

1500

1000

500

0
May-15

May-17

May-19
Feb-15

Mar-16

Feb-17

Mar-18

Feb-19

Mar-20
Apr-14

Oct-15

Oct-17

Oct-19
Nov-14

Nov-16

Nov-18
Sep-14

Sep-16

Sep-18
Jun-14

Jan-16

Jun-16

Jan-18

Jun-18

Jan-20
Jul-15

Jul-17

Jul-19

Not Covered Covered

6 IndusInd Bank
 In s titu tio n a l E q u itie s

DISCLOSURES
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7 IndusInd Bank
 In s titu tio n a l E q u itie s

Disclaimer
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Team Details:
Name Email Id Direct Line
Rahul Arora CEO [email protected] -

Girish Pai Head of Research [email protected] +91 22 6273 8017 / 18

Dealing

Ravi Jagtiani Dealing Desk [email protected] +91 22 6273 8230, +91 22 6636 8833

Michael Pillai Dealing Desk [email protected] +91 22 6273 8102/8103, +91 22 6636 8830

Nirmal Bang Equities Pvt. Ltd.

Correspondence Address
B-2, 301/302, Marathon Innova,
Nr. Peninsula Corporate Park,
Lower Parel (W), Mumbai-400013.
Board No. : 91 22 6273 8000/1; Fax. : 022 6273 8010

8 IndusInd Bank