Operating Performance Remains Healthy; Reiterate BUY
IndusInd Bank (IIB) has delivered a healthy performance on operating front in 4QFY17. Its operating profit grew by 36.6% YoY and 15.3% QoQto Rs15.7bn led by robust growth in balance sheet and healthy improvement in NII and fee-based income. Its NII grew by strong 31.5% YoY & 5.6% QoQ to Rs16.8bn. Led by robust growth in advances and stable NIMs of 4%, IIB’s NII grew by strong 31.5% YoY & 5.6% QoQ to Rs16.8bn. However, on the back of 101.3% YoY and 98.3% QoQ rise in provisioning expenses to Rs4.3bn, the Bank’s net profit grew relatively lower by 21.2% YoY and 0.1% QoQ to Rs7.5bn. Sharp rise in provisioning expenses is attributable to divergences referred by the RBI on alarge loan exposure to one cement company. Management clarified the exposure as a bridge loan for an ongoing M&A transaction, which is expected to be paid back in subsequent quarter. Notably, notwithstanding adverse macro condition, the Bank showed greater resilience on asset quality front with its gross and net NPA remaining within the management’s comfort zone. After successfully achieving the envisaged target for Planning Cycle-III (FY15-17), the Bank has given similar guidance for Planning Cycle-IV (FY18-20) as well. Rolling over our estimates to FY19E, we reiterate our BUY recommendation on the stock with an upwardly revised Target Price of Rs1,716 based on 3.4x FY19E Adjusted book value.
Management Commentary & Guidance
* Under newly introduced Planning Cycle-IV, the Bank will look forward to double its loan book over next three years. Major growth will come from organic route with corporate and consumer division will have approximately a 50:50 mix.
* Appearing to be very gung-ho, the Management expects to treble its microfinance business organically in next two years. It is also keen in acquiring any large microfinance company. We may see some meaningful development on this front in next few months.
* The Bank expects to expand branch network to 2,000 by FY20 from current level of 1,200. Further, it also expects to reduce its cost to income ratio by 200bps during the same period.
* Fresh slippages stood at Rs6.3bn in 4QFY17 compared to Rs2.8bn in 3QFY17 and Rs2.7bn in 4QFY16, primarily due to classification of two large corporate accounts.
Outlook & Valuation
Considering the track record, we believe that the Bank will be able to achieve the ambitious target set under the newly introduced Planning Cycle-IV. We expect that the Bank is likely to sustain strong growth in CASA deposits and fee-based income as its total branch count is expected to reach 2,000 FY20-end. Rolling over our estimates to FY19E, we reiterate our BUY recommendation on the stock with an upwardly revised Target Price of Rs1,716 based on 3.4x FY19E Adjusted book value (from Rs1,447 earlier).
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