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……Downgrade to market performer !!!
We downgrade our rating on Indusind Bank from BUY to Market Performer with revised TP of ₹1693 on worries of higher credit cost than guided by the bank and likely change in the mgmt. For Q4FY19, the bank reported PAT of ₹3.6 bn which was down by 62% yoy led by higher provisioning on IL&FS exposure while operating profit growth was strong at 34%. Importantly, the bank has exposure to the troubled cos including names like Essel Group and Reliance ADAG Group. Jet Airways is 1.9% or ₹35.4 bn while these are yet to be recognized as NPAs. In our view, there is outsized possibility of these assets turning into NPAs leading to higher credit cost. In our view, credit cost estimate could be at 1.2% for FY20 vs. mgmt. guidance of 0.6%. Also, retirement of Mr.Romesh Sobti in FY2020 could add to the worries. There is possibility of slowdown in the retail assets growth given declining sales volumes of auto industry. All these factors put together makes us believe that improvement in the valuation multiples looks unlikely. Hence, we have downgraded our rating on Indusind Bank from BUY to Market Performer with revised TP of ₹ 1,693, upside of 5% from the current levels. At our target multiple, the bank would trade at 2.85x on FY21e ABV. Upside risk to our call could come if there is any positive resolution on any of the big loans where the bank has exposure to.
Credit cost estimated to higher at 1.2% for FY20 vs. mgmt. guidance of 0.6%
For FY19, the bank recognized its exposure to IL&FS as an NPA which amounted to ₹30 bn (₹20 bn exposure to Holdco and ₹10 bn to SPV). It has provided 70% on holdco and 25% on SPV while writing off ₹10 worth of loans. Hence, the incremental provisioning burden on this account going forward is not there. However, there is still some exposure to troubled companies which is yet to be recognized as an NPA (these include cos like Reliance ADAG group, Jet Airways, Essel Group). And in our view, there is possibility of these turning into NPAs in FY20. Apart from this there could be normalized slippages from the rest of the book. Hence, the credit cost guidance of 0.6% for FY20 looks to be on lower end. As per our estimation, credit cost would be at 1.2%/0.8% for FY20e/FY21e on the back of slippages numbers of 2.2%/1.8% for the same period. Currently, SMA 2 accounts are at 0.3% or ~₹6.4 bn
Profitability for FY20 will look better on the lower base
We expect PAT to grow by 39% for FY19e and by 34% for FY21e – growth looks better largely due to lower base. FY19 profitability was marred by higher provisioning on IL&FS loans that turned NPA. We expect credit to grow at slower pace at 22% in FY20 lower than FY19 levels of 29% largely led by slowdown in the auto industry sales volumes. Despite that, operating profit growth should be healthy at 23%. Taking into consideration, higher credit cost of 1.2%, PAT is likely to grow by 39% on the lower base of FY19.
NCLT approval pending for BHAFIN merger
The bank has received approvals from the respective boards, shareholders, creditors and RBI while NCLT approval is pending. Merger would give the bank direct access to >1lac villages in 381 districts with a customer base of 8.8 mn. This low cost rural focused unique distribution model will leapfrog the rural strategy of the bank by multiple years. Other benefits could be better cross-sell opportunities, lower cost of funds & lesser requirement of capital boosting return profile of the bank.
Exposure to troublesome companies accounts for 1.9% of the total loans. There is large possibility of these assets turning into NPAs in FY20. In addition to this, retirement of Mr.Romesh Sobti could add to the woes. In this backdrop, expansion in valuation multiples looks limited. Hence, we have downgraded our rating on Indusind Bank from BUY to Market Performer with revised TP of ₹1693, upside of 5% from the current levels. At our target multiple, the bank would trade at 2.85x on FY21e ABV. Upside risk to our call could come if there is any positive resolution on any of the big loans where the bank has exposure to.
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