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Q1FY20: Back on track
IndusInd Bank’s (IIB) first set of merged numbers reverted back to trends with credit costs reverting to guidance levels of 60bps and ROA back at 2% - and more importantly, no further revision in stressed assets. Net profits came higher than expected as margins were slightly better and opex and credit costs came in lower than expected. GNPA increased 10bps QoQ to 2.15% with credit costs stable at ~60bps. Stressed assets as disclosed by the bank in Q4FY19 improved statistically to 1.7% from 1.9 mainly due to the merged loan book. With the Bank sticking to its earlier credit cost guidance of 60bps, the stock has the potential to regain lost ground as it trades at 2.5x P/ABV for FY21E. We reiterate our BUY rating on the stock with a slightly revised target of Rs2,239.
* NIM trajectory to improve: Management guided that the bank will report improving margin trajectory as merger synergies have not fully played out yet. This would be partly driven by some higher yield off-balance sheet exposures of BHAFIN coming on to IIB’s loan book in the coming quarters as also repricing some of BHAFIN’s borrowings downwards..
* Stressed book declined to 1.7%: Stressed book disclosed by the management shrunk to 1.7% in Q1FY20 from 1.9% in Q4FY19, partly driven by a higher denominator of the merged loan book but also by a Rs3 bn reduction in the stressed book.
* Earnings outlook: We fine tune our estimates and look for 31% PAT CAGR from FY18-21E with RoA estimated at 2.0% in FY20E and 2.1% in FY21E.
* Valuations and target price: IIB trades at 2.8x P/ABV and 14x P/E 1-year forward. The opportunity of expanding profitability and robust growth is factored into our DDM-based target price of Rs2,239, implying a 48% upside and meriting a BUY rating on the stock.
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