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Our Take:

Indian Bank is amongst the better managed PSU banks as it has required limited support from the Government to raise funds. It has long track record of relatively better performance among the PSU banking pack. The bank has remained profitable despite higher provisioning requirement indicating that its asset quality is superior to some of the other PSU banks which have required huge infusion of capital. Unlike other PSB peers, Indian bank has never reported a single rupee of loss in the last decade despite plethora of credit challenges in the industry.

In fact the bank has distributed dividend to its shareholders seven times in past ten years. It is also well placed in terms of capital positioning as compared to other PSB peers. The bank has diversified asset portfolio and the increased focus on RAM segment (retail agriculture and MSME) will lead to better risk diversification, increased revenue and improved margins. We remain cautious on the asset quality front due to high corporate book. It has high BB & below rated book and has high exposure to sectors like Infrastructure, NBFC etc. Even the management is circumspect about retail and MSME segments for the coming quarters. However inexpensive valuation along with strong liability franchise and low cost of funds gives us comfort for the long term.

It is a play on the gradual recovery in the Indian economy. Recent announcement of the Union Cabinet’s approved of Central Government guarantee of up to Rs. 30,600 Cr to National Asset Reconstruction Company Limited for five years will be positive for large PSU banks. Faster resolution by the IBC could also help in recoveries and bring down slippages in future. Privatization buzz has kept the PSU bank sector in limelight and we believe acquisition of some PSU Banks by the any prestigious corporates/Institutions – local or foreign - at a good valuation may rerate the sector.

Valuation & Recommendation:

We expect Indian Bank to grow its loan book at 9% CAGR while NII and Net profit are expected to grow at 7.5% and 39.5% (due to lower base) CAGR respectively over FY21-23E. ROAA is estimated to improve to 0.8% in FY23E from current 0.6% in FY21 and RoE could rise to 12.4% from 9.9% in FY21. We expect healthy recoveries and upgrades in next two years.

Asset quality trend of corporate and MSME would be the crucial monitorables. Most of the concerns arising out of pending writeoffs out of restructured/SMA accounts are already in the price. We have assumed higher recoveries and lower slippages going forward. NIMs may also start stabilizing around 3% level.

We believe that investors can buy Indian bank at LTP of Rs.139 (0.46xFY23E ABV) and add more at Rs.121 (0.4xFY23E ABV) for the base case fair value of Rs.158 (0.52xFY23E ABV) and for the bull case fair value of Rs.170.5 (0.56xFY23E ABV) over the next two quarters.

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