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Navigating well in turbulent times; growth to revive

IndusInd Bank posted modest results in Q4FY21 on the business growth front while asset quality showed a sequential improvement. On the operating front, numbers were in line with our estimates. Net interest income increased 9.4% YoY and 3.8% QoQ to | 3535 crore with stable NIMs at 4.1% QoQ. Margins remained stable as excess liquidity had a drag on benefit of reduction in cost of funds. Other income was up 4.4% QoQ, driven by 9% QoQ uptick in core fee income.

In turn, this was boosted by 24% QoQ rise in retail fees. Cost-to-income increased 56 bps QoQ to 42.4% as opex increased due to revival in business activity. The bank during the quarter made provisions worth | 1866 crore and was flattish QoQ. Net profit came in at | 876 crore and was in line with our estimates

On the asset quality front, reported GNPA, NNPA numbers increased from 1.74%, 0.22% to 2.67%, 0.69%, respectively, as standstill classification norms were quashed recently leading to higher reported NPAs. However, compared to previous quarter proforma GNPA of 2.93% there was a sequential improvement of ~26 bps. Write-offs during the quarter were at | 1350 crore while upgrades and recoveries came in at | 1875 crore, | 968 crore, respectively.

Total restructured book is now at ~2.01% of which 1.8% is related to pandemic. The bank has specific provisions of | 3488 crore, floating provisions of | 70 crore, counter cyclical provisions worth | 760 crore and standard contingent provisions of | 1600 crore. Overall loan related provisions were at ~3.3% of advances. The bank sold bad loans worth | 830 crore to ARC.

Collection efficiency improved from 97% to 98% QoQ with secured book showing better than average collection efficiency. Loan book showed modest growth of 2.6% QoQ, 2.8% YoY, which was a result of 0.3% de-growth in corporate book, as the management looks to granulise and re-align the same. The bank sold | 3500 crore corporate book during Q4FY21 and ~| 9000 crore for FY21. The bank expects higher growth in FY22E with corporate book making positive contribution in incremental demand.

Vehicle finance segment saw strong rise in disbursement, up 30% YoY, led by CV segment disbursement up 54% YoY, and tractor segment up 44% YoY. Deposit mobilisation was healthy at 27% YoY and 7.1% QoQ to | 256205 crore, aided by strong 11% sequential growth in CASA deposits.

Valuation & Outlook

The management is geared to pedal growth ahead with focus on certain segments. Improvement in capitalisation levels post warrant subscription by management to aid strength for balance sheet expansion. We expect business momentum to pick up from here on with corporate re-alignment largely achieved. Asset quality is expected to improve in FY22E, though impact of second wave needs to be assessed.

The bank has conservatively provided its unsecured, MFI loans and has ample provisions on books, which should reduce earnings volatility. Hence, we upgrade our target price at | 1100 (earlier | 1050), valuing the stock at ~1.9x FY23E ABV. We maintain BUY recommendation.

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