We remain Ďunderweightí on Indusind Bank with a price target of Rs 375. Our September 2014 price target is based on a two-stage Gordon growth model implying 2.2x September 2014 price-to-book. Our valuations factor in cost of equity at 15.7%, normalised ROE of ~21% and terminal growth of 5%.
At 2.1x P/BV (FY15e), with ROA pressures building up from both margins and asset quality, the stock trades at very rich valuations compared with its peers. Given the weak demand in the CV segment, we expect asset quality to remain under stress in the medium term. Margins are also likely to remain under pressure, with the high rate environment persisting for a longer time.
We expect the multiple to trend downwards as asset quality and margin pressures manifest in the medium term for the bank. The bank has a high exposure to the CV segment (19% of loan book). With the continued stress in the CV segment, we expect asset quality to remain weak in the medium term. Hence, we believe current credit costs (51 bps Q3 FY14) are not sustainable and expect them to rise in the medium term. We are modelling in higher credit costs of 73 bps for FY14e.
The rates have remained higher for a very long time due to inflation. We expect margins to remain under pressure as it will be difficult to pass on higher costs to borrowers as it may cause further asset quality pressures.
- JP Morgan