Indian Bank: Improving asset quality and cheap valuation make the counter attractive
The prime attraction of the Q4 results was improvement on the asset quality front where its net NPA declined 24 basis points to 2.5%.
The prime attraction of the fourth quarter results, however, was improvement on the asset quality front. While its gross non-performing assets (NPA) declined 12 basis points (bps) quarter-onquarter to 4.4%, its net NPA declined 24 bps to 2.5%. Analysts feel this turnaround will continue because the lender's asset quality was deteriorating in the last five years due to the economic slowdown. Despite this small cut, gross and net NPA is placed significantly higher compared to its 2009-10 values of 1% and 0.5% respectively. The bank's asset quality is likely to improve due to the expected economic recovery. Also, the improvement in asset quality is expected to be faster because of the lender's lower exposure to power and steel sectors.
This mid-sized PSU bank, with around 2,400 branches, has seen credit grow at a compound annual growth rate (CAGR) of 19% in the past four years, while the industry growth rate is pegged at 17.4%. It also has a well-diversified loan book. Due to increased traction from retail, micro, small and medium enterprises, and agriculture, the bank is expected to maintain above-average industry growth rates in the coming years as well. Since the banks is well capitalised, it should be able to ride on the economic revival. With stability on asset quality front, its net profit is expected to grow at a CAGR of around 29% in the next two years.
Also, as the counter has massively underperformed in the past six months, the stock is trading at attractive levels. With a price to book ratio of 0.61 and a price to earnings ratio of 7.75, this counter is a must buy for any long-term value seeking player.
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