Daiwa Capital Markets: Upgrade IndusInd bank to ‘buy’, 12-month TP Rs 1,730

The bank’s corporate loans grew only 8% Y-o-Y (after adjusting for the sale of loans and repayments of stressed loans) in 2Q FY20.

By Daiwa Capital Markets

What’s new: IIB posted 50% Y-o-Y growth in net profit for 2Q FY20, largely meeting market expectations. Net additions to NPLs in 2Q FY20 were very low, with only a 4bps Q-o-Q rise in GNPLs. Stressed loans exposure came down 60bps Q-o-Q to 1.1% of the loan book, and management guided for them to fall further to 0.8% of loans by October 2019 through scheduled repayments.

What’s the impact: The bank benefitted from reduction in corporate tax rates. While it also had to provide for repricing of its deferred tax assets (DTA), it brought down the tax rate to 25.6% in 2Q FY20 from 34% in 1Q FY20. The bank took advantage of the low tax rate and accelerated provisioning on its GNPLs, leading to an improvement in provisioning coverage. The bank’s exposure to Indiabulls Housing Finance stood at 0.27% of the loan book. Its exposure to Indiabulls Real Estate businesses stood at 0.45% of the loan book, and management expects it to come down to 0.2% in 3Q FY20. The bank’s corporate loans grew only 8% Y-o-Y (after adjusting for the sale of loans and repayments of stressed loans) in 2Q FY20. The large corporate loan book fell by 2.3% Y-o-Y and 3.8% Q-o-Q on a reported basis. Retail loans however, grew 34% YoY, led by 57% YoY growth in unsecured loans, 20% YoY growth in the vehicle loan book, and 32% YoY growth in microfinance.

What we recommend: We revise up our FY20-22E net profit by 6.3-9.8%, largely due to the lower tax rate for the bank. Recent concerns over the bank’s stressed loan exposure have resulted in a share-price correction, but we expect the exposure in stressed loans to decline over the next 6 months. Hence, we maintain our 12-month TP at Rs 1,730, based on a 3.4x PBR applied to our FY20E BVPS, and as it offers 41% upside potential, we upgrade our rating to ‘buy’ from ‘outperform’

How we differ: Investors have been concerned about the bank’s exposure to some of the stressed corporate loans. However, we believe that management has been able to handle these stressed loans quite well, and that they will continue to come down in 2H FY20.