India's banking sector has been hurt by RBI’s July rate/liquidity reversal. Our meeting with IndusInd Bank Ltdmanagement (and that of other banks) suggests IIB is relatively more exposed to this turn: larger share of whole-sale funding, relatively large fixed rate retail book and its big vehicle lending (growth challenge).
IIB will hurt on margins; management sees a max impact of 50bps (from 370bps), moderating over time (limited bond erosion). IIB will also grow slower (guidance: 20%+ vs 25%+ previously); as management also gets cautious (comfortable on auto book — little less so on mid-corp loans). This mix with dampen the biz momentum, and its earnings trajectory (we cut earnings — 6/-8/-6% FY14/15/16E); but management sees a margin and growth recovery, once the economy bounces back.
IIB remains, in spite of peer caution, confident on its broader auto loan portfolio (50% of loans). It’s confident of quality (mid-sized fleets) and growth (car lending, shift to light trucks away from heavy ones).
Some of IIB’s concentration challenges — visible in recent market upheaval — will likely weigh on IIBs otherwise excellent build out/momentum and management, and on its relatively high recent valuation range. We see fair value at 2x PBV 1 Yr Fwd (2.5x earlier) – or Rs 360. Maintain sell.