By HSBC Global Research
The IndusInd Bank (IIB) stock has underperformed, with concerns resurfacing on asset quality and risks about CEO succession. We do not expect an outsized deterioration of asset quality and believe the investment case is still intact with healthy buffers. We lower our target price to Rs 1,825 from Rs 2,000; stabilisation of asset quality and CEO transition are key catalysts.
After the Q3FY20 results and the SC’s February 14 ruling on telcos’ AGR payments (concerns resurfacing on IIB’s exposure to Vodafone Idea), IIB’s stock price is down 12% in a month. IIB’s stressed exposures had kept the stock price volatile since September 2018. Current concerns revolve around any further stress in the corporate book; growth and NPAs for retail book; and uncertainty about CEO succession. Combined with long-standing questions on the quality of the liabilities franchise and sustainability of fee income, these concerns have led to dissipation of the valuation premium IIB had commanded. In the corporate book, high loan growth in the past was not at a variance with peers and is now slowing down, the rating mix is stable and sectoral exposures are not alarming.
Our positive view on the bank is predicated on a substantial medium- to long-term growth opportunity for the bank along with proven specialist assets businesses (vehicle finance, microfinance), a scaling up of other parts (retail liabilities, other retail assets and wholesale) to fill gaps, a favourable competitive landscape and strong buffers in operating profitability and capital.
We lower our FY21/22 PAT by 8%, led by higher credit costs. This leads to a still healthy RoE of 18% and an FY20-22e EPS CAGR of 26%, resulting in our lower TP of Rs 1,825, which implies 2.6x 1-yr fwd BV and 15x 1-yr fwd EPS. The stock could trade at 1.8x 1-yr fwd BV, in line with current levels, if we assume 15% loan growth and credit cost staying at 160 bps.