This bank stock has room to rise 50% but for the cloud of bad loans
Analysts said the bank has material exposure to troubled HFCs and telecom companies.
Analysts said the bank has material exposure to troubled housing finance and telecom companies. Also it is yet to find a Chairman. But valuation buffer still makes this stock a compelling ‘buy’, they said.
After September quarter numbers released on Thursday, Credit Suisse set a price target of Rs 1,800 on the stock. Edelweiss Securities had a target of Rs 1,783, Morgan Stanley Rs 1,700, Nomura India Rs 1,575 and Macquarie Rs 1,530, suggesting up to 50 per cent upside potential. The stock traded at Rs 1,198 on Friday.
On Thursday, the bank reported 52 per cent jump in September quarter profit, thanks mainly to Bharat Finance’s integration. But it reported a higher-than-expected slippage, which shot up by 42 per cent QoQ to Rs 1,102 crore. As a result, provisions for bad assets jumped sequentially by 71 per cent to Rs 737.70 crore. But the private lender managed to keep gross non-performing assets (NPAs) stable at 2.2 per cent.
The scrip fell 6 per cent on Thursday and another 2 per cent on Friday.
The bank’s identified stress pool in respect of three accounts – namely ZEE, DHFL and the ADAG group – declined 80 basis points QoQ to Rs 2,100 crore in September quarter, which was 1.1 per cent of its loan book. The bank management believes this will decline further to 0.8 per cent level in 10-15 days.
Also, management expects the bank’s exposure to the Indiabulls group to fall from current 0.72 per cent to 0.47 per cent in Q3. Corporate loans formed 45 per cent of the bank’s loan book in September quarter compared with 61 per cent at the end of March quarter.
"IndusInd Bank doesn’t have a chairman as of now. We believe the board may try to retain Mr Romesh Sobti as non-executive chairman and appoint retail banking head Kathpalia as CEO, as he best suits the role,” said Macquarie, which valued the stock at 2 times FY21E P/BV.
“It is ‘cheap’ for a best-in-class ROA profile of 2 per cent and normalised ROE of around 18-20 per cent,” the brokerage said.
“We still expect the bank to deliver 18 per cent ROEs and following its recent de-rating. The stock trades at 1.8 times September 2021 BV of Rs 680. Our new, lower target of Rs 1,575 is based on 2.3 times September 2021 book and14 times earnings, similar to corporate banks now,” Nomura India said in a note.
Edelweiss Securities said the bank continues to deliver reasonable and sustainable earnings growth and strengthen its liability franchise. “Despite concerns on exposure to stressed groups, we believe earnings accretion from the merger (yet to crystallise), superior growth and improved revenue traction will drive earnings,” it said and revised down its price target for the stock to Rs 1,793 from Rs 2,060.