IndusInd Bank’s share price crashed 27% on March 11, hitting the new 52-week low mark. The stock hit three lower circuits one after another before 10 am on the National Stock Exchange as troubles for IndusInd Bank just don’t seem to fade away. In yet another negative event, IndusInd has disclosed a negative post-tax impact of 2.35% of net worth arising from a markdown on internal derivative trades. Leading brokerage houses have downgraded their ratings on the stock and significantly cut the target price as well. According to most analysts, this is a big worry because a negative derivatives’ disclosure has the potential to unnerve investors more than a back-dated NPL disclosure.
Nuvama downgrades IndusInd Bank to Reduce
Nuvama Institutional Equities believes that the news will impact “IndusInd Bank’s credibility and earnings” and as a result are downgrading the stock to Reduce from Hold. The target price has also been cut to Rs 750 a share from Rs 1115 per share. This is a massive 32% cut in the target price estimate.
Rationalising their decision, Nuvama highlighted that “given low visibility on succession and earnings, MFI stress, derivatives and change of guard,” they are downgrading the stock. The CEO explained the Board, “would consider internal and external candidates as part of succession planning.”
According to the Bank, these internal trades pertain to 5–7 years up to March 31, 2024 and were internal FX derivatives on the bank’s forex borrowings (mainly multilateral) and deposits. IndusInd Bank hired an agency to carry out an external audit in Q3FY25. This development no doubt exacerbates the bank’s problem, coupled with the CFO resigning just before the Q3 earnings and the CEO on a one-year extension instead of three.
Motilal Oswal downgrades IndusInd Bank to Neutral
Motilal Oswal also downgraded the stock to Neutral with a revised target price of Rs 925/share. According to the Motilal report, the “stock has been on a downward trajectory, facing multiple setbacks, including weakened operating performance and the MD receiving only a one-year term Vs three-year regular term proposed by the board.” According to them, “the recent accounting discrepancies related to derivative transactions have further dampened sentiments and are likely to drive losses in Q4FY25 as the bank absorbs the impact through its P&L.”
They believe “the board will expedite the process of evaluating both internal and external candidates for a suitable successor, which should help alleviate concerns and improve confidence in the bank’s operations.”
Macquarie maintains Outperform rating on IndusInd Bank
Macquaries has a different stance. It has an ‘Outperform’ rating on the stock, with a target price of Rs 1,210. The brokerage house said that the current issue raises questions on internal processes. It will create questions on the robustness of the bank’s internal process and compliance. This could be one of the reasons behind RBI’s approval for a year’s tenure to the current CEO. “Channel checks seem to suggest that such kind of losses are possible when the book is not fully covered, and as per some treasury heads of banks, the new RBI accounting rules cannot solely explain the discrepancy,” said Macquarie.
Morgan Stanley sees visibility fading away
The international brokerage house Morgan Stanley said that visibility on IndusInd Bank is fading. Over the past three months, first the CFO of the lender resigned, second the CEO was given a shorter tenure extension, and now it made investors aware of a big loss in the derivative portfolio. Morgan Stanley sees downside risk to numbers post the company’s disclosure. The brokerage firm has an ‘Equal Weight’ call on the stock, with a target price of Rs 900 per equity share.
Prabhudas Lilladher downgrades IndusInd Bank to Hold
Prabhudas Lilladher downgraded IndusInd Bank to ‘Hold’ from ‘Buy’ and reduced the target price to Rs 1,000 from Rs 1,400 per share. According to them, while an external review is underway to ascertain the exact impact, internal review suggests a 2.35% hit to equity. “Impact on Q4FY25 PAT may be Rs 1580 crore post-tax, which could be split into interest expense and treasury, suggesting a cut of 25% in FY25 PAT. In our view, this episode had a bearing on RBI’s decision to extend MD & CEO’s tenure only for 1 year. Valuation is 0.9x on FY27 ABV.”