>SET TO SOAR: INDUSIND BANK (IDFC SSKI)

At IndusInd Bank (IndusInd), an era of renewed vigour has been ushered in, engineered by a new management. The past six quarters symbolize a marked improvement in IndusInd’s operating metrics, as evident in a 140bp expansion in NIM to 2.9% in Q2FY10, 5.5% increase in CASA ratio to 21.2% and steep drop in C/I ratio – all converging into an impressive RoA expansion of 80bp to 1.1%. With focus on fortifying the liability profile and adding fee based revenue streams, we expect the bank to exhibit a 66% CAGR in earnings over FY09-11. Led by RoA expansion to ~1.15% by FY11E, we see a strong case for re-rating of the stock on market cap to assets metric, where it lags peers by 40-50%. We expect the stock to outperform the 20% CAGR in assets estimated over FY09-11. Current valuations of 2.4x FY11E adjusted book offer an attractive entry point. Initiating coverage with Outperformer.

A turnaround…: The management’s enhanced strategic clarity and execution capabilities are reflected in consistent uptick in the bank’s operating metrics for the last six quarters. Shrugging off past tribulations, IndusInd now has streamlined systems and processes to grow ahead of the industry average. Network expansion, improvement in CASA & retail deposit share, traction in fee income and stable provisioning requirements are expected to converge into margin expansion (~115bp over FY09-11E) and strong earnings growth in the near term.

…and subsequently a high growth trajectory…: A stronger liability franchise and expanding footprint would drive rapid growth in the bank’s loan book. Well entrenched in the CV financing industry, IndusInd would also benefit from receding competition. The bank is equipped to gain market share, and derive operating leverage from better productivity of the existing network.

…make a case for stock’s re-rating: Growth momentum would gather pace and correction in asset-liability pricing is expected to ease the pressure on margins. Driven by a 66% CAGR in earnings over FY09-11E, we expect IndusInd’s RoA to increase from 0.58% in FY09 to ~1.15% by FY11. Current valuations of 2.7x FY10E and 2.4x FY11E adjusted book appear attractive in view of the strong earnings growth and improving return ratios. With substantial RoA expansion in the offing, we expect the stock to be rerated on the market cap to assets parameter, where it lags peers by 40-50%.

To see the full report: INDUSIND BANK