>INDUSIND BANK LIMITED (DOLAT CAPITAL)

New wine in a new bottle…!!!

IndusInd Bank is in restructuring mode after a change in the top level management. The bank historically was characterized by low business growth and profitability. However, the restructuring efforts have started showing results with improved performance in the various business segments – profitability, NIMs and business growth. We believe the stock is yet to completely re-rate with the change in business performance. At CMP, the stock trades at 11x FY11E EPS of Rs 7.1, 1.6x FY11E book value of Rs 47 and 2.2x FY11E adjusted book value of Rs 35. We recommend a BUY with a target price of Rs 94 (2x FY11E book value) over the next 12 months.

Investment Rationale

■ Change of guard to augur well for business growth
IndusInd bank has roped in a new management with a clear focus on profitability, productivity and efficiency. The new management aims to reposition the bank as a top 3 performer – in terms of RoE, RoA, NIM, Asset Quality and efficiency amongst the new private banking space. The management has created separate business units to cater to the needs of specific customers and increase the client base. Additionally, effort has been made to increase per branch productivity and efficiency with a focus on cost reduction. The bank has licenses for 30 branches from RBI and intends to apply for additional licenses. This, in our opinion, would entail higher CASA and consequently stronger NIM’s. We expect the bank’s core earnings to register a 31% CAGR during FY09-FY11e.

■ Improvement in core operations
The restructuring process has started showing results in the bank’s performance with core earnings growing 53%, NIMs improving to 1.9% (1.5% in FY08) and net profit growing by 98% in FY09. Further, the C/I ratio has improved to ~60% (67% in FY08). Going forward, we expect the bank’s core earnings to grow by a 31% CAGR driven by business growth of 22.2% CAGR and NIMs improving to 2.3%. Net profit is expected to grow by 30% CAGR after factoring higher slippages and also increasing the coverage ratio to 48.5% (30% in FY09). The RoE and RoA improve to 13.7% and 0.7% in FY 11e respectively.

■ Factoring in asset quality deterioration but no major worries
The bank has been saddled with poor asset quality historically. However post the turnaround in its strategy, the bank has been able to improve its gross NPL’s and net NPLs to 1.6% and 1.1% respectively (3.1% and 2.3% in FY08) with a coverage ratio of 30%. We factor in increased slippages for the bank (gross NPL’s at 3.3% in FY10E and net NPL’s at 1.7% in FY10E) and consequently build in higher provisions in our estimates.

View and Valuations

We believe that the bank will continue to reap the fruits of its turnaround strategy and record an impressive growth on the business and operational front. We believe the stock is yet to completely re-rate with the change in the business performance. At CMP, the stock trades at 11x FY11E EPS of Rs 7.1, 1.6x FY11E book value of Rs 47 and 2.2x FY11E adjusted book value of Rs 35.4. We recommend a BUY with a target price of Rs 94 (2xFY11E book value) over the next 12 months.

To see full report: INDUSIND BANK