Thursday, July 16, 2009



Results confirm our positive transformation thesis

IndusInd Bank posted strong 1QFY10 earnings, beating our PAT
estimates by 81%. The improvement was broad based – net interest income, fee income and credit costs all coming in better than our estimates. Key highlights are:

1) Net interest income 5% higher than budgeted on marginally higher loan growth (4% q-q) and in-line NIM of 2.6%.

2) Non-interest income 64% higher than expected on higher treasury gains, forex income and robust fee income growth.

3) P&L provisioning costs 13% lower than expected on lower than anticipated NPLs. Net NPL ratio down to 1% from 1.1% in the previous quarter (our estimate was 1.2%).

4) Annualized return on asset (RoA) for the quarter much higher at 1.3% compared to our estimate of 0.7% and 0.8% for the previous quarter.

Detailed comparison in Exhibit 1 in report.

Valuation: Recommend BUY with TP of INR90
While we are yet to revise our estimates and TP after 1QFY10 results, we believe IndusInd Bank is firmly on the transformation path. We reiterate our BUY rating on the stock. As highlighted in our initiation report (The comeback kid – published June 10, 2009), given management’s intent and strategic focus, IndusInd is well poised to break into the big league within the private sector bank space in the next few years.

Our TP of INR90 is derived from a three-stage residual income model. At our TP, IIB is valued at 1.77x the FY11E ABV and 12.6x FY11E EPS. We expect IndusInd to achieve an adjusted ROE of 15.5% by FY11 and 16.8% by FY12 on an expanding capital base. IndusInd Bank is looking
to raise approximately USD100m in equity in 2QFY10.

Our current estimates are factoring in the dilution at an average price of INR55 per share. Lower than expected equity dilution due to the strong price record in the recent past will provide upside to our EPS estimates.

To see full report: INDUSIND BANK