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Strong quarter; on track for valuation rerating

IndusInd reported a strong 1Q23 quarter: a) robust core operating performance (core PPOP growth at +5% QoQ, +26% YoY), b) strong growth momentum (loans + 18% YoY, deposits +13%YoY) and c) steady asset quality (GNPL/NNPL/restructuring at 2.35%/0.7%/2.1%; +8bps/+3bps/-50bps QoQ). Loan growth was broad based spread across sectors and management indicated that while macro headwinds exist, IIB remains on track to achieve loan growth of 15-18% going ahead. Core operating performance remains robust driven by stable NIMs (+1bps QoQ) and strong core fee income growth (+8.6% QoQ) driven by retail fees. While slippages were a tad high at INR 22.5bn (4.3% annualised), asset quality remains comfortable especially given IIB’s strong standard contingent provision buffer of 1.4% of loans and PCR of 72%. Over the last few years, management has taken steps in the right direction (risk calibrated growth approach, retailization of deposit profile, balanced fee mix) which should start bearing fruits incrementally, resulting in improvement in return profile of the bank. We expect credit costs to moderate from to 1.6%/1.4% for FY23/24E and see RoA/RoE to gradually improve to 1.9%/16.5% by FY24E. IIB trades at inexpensive valuations of 1.1x FY24E BVPS and we expect stock to rerate upwards aided by steady delivery on growth and return metrics. Maintain BUY with a TP of INR 1,270 valuing the bank at 1.6x FY24E P/BV.

* Strong quarter: Loan book witnessed a strong growth of +3.7% QoQ/ +17.7% YoY, driven by +4.5% QoQ/ +23.8% YoY growth in corporate and +3.0% QoQ/ +12.9% YoY growth in retail segments. Management expects loan growth momentum (15-18% CAGR) to sustain driven by broad based growth across segments. Further, management highlighted that they are seeing continued interest in towards capex across various sectors which should fuel growth in corporate segment. Deposits witnessed a healthy traction growing at +13.3% YoY/ +3.2% QoQ. CASA improved to 43.1% (+40bps QoQ) while retail deposits grew +3% QoQ/ +17% YoY and now stand at 41% of overall deposits. Margins were steady at 4.21% (+1bps QoQ) supported by repricing of assets in tandem with liabilities. Core PPOP growth was strong at +5% QoQ, +26% YoY aided by strong core fee income growth (+8.6% QoQ) driven by retail fees and steady opex (+21% YoY). Trading income was reported at INR 1.5bn (-44% QoQ) on account of impact of rising interest rates)

* Steady asset quality: GNPLs/NNPLs/restructuring were reported at 2.35%/0.7%/2.1%; +8bps/+3bps/-50bps QoQ. Slippages were a tad high at INR 22.5bn (4.3% annualised) with c.41% coming from restructured pool. Asset quality remains robust across segments: Vehicle Finance – CE of standard book at pre covid levels, MFI – CE of standard book at 99.1%, Gems and jewellery – no SMA and corporate – INR2.5bn slippage from retail group while exposure to stressed telco at INR 18.5bn (INR 10bn fund based). IIB holds excess provision buffer of 1.4% of loans which along with its PCR of 72% should keep credit costs under control (JMFe credit costs of 1.6%/1.4% for FY23/24E).

Valuation and view: IIB trades at inexpensive valuations of 1.1x FY24E BVPS and we expect stock to rerate upwards aided by steady delivery on growth and return metrics. Maintain BUY with a TP of INR 1,270 valuing the bank at 1.6x FY24E P/BV.

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