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Three year plan – focus on growth, gradual RoA uptick

About the stock: IndusInd Bank is a Hinduja group promoted newer age private sector bank and is the fifth largest private bank in India.

          • Vehicle finance forms around 26% of overall loans

         • Strong pan-India presence with 2600 branches as on March 2022

Q4Y23 Results: IndusInd Bank reported an in line performance.

          • Loan growth up 21.3% YoY. NII up 17.3% YoY, NIMs steady QoQ at 4.28% • PPP up 12.7% YoY. Lower provision leads to ~50% YoY jump in PAT

         • GNPA down 8 bps QoQ to 1.98%. Restructured book down 40 bps to 0.84%

What should investors do? IndusInd Bank’s share price has gained ~30% in the past two years. Higher than industry credit growth, selective lending with emphasis on high yield segments and moderation in credit cost to aid improvement in RoA to ~1.9% over FY24-25E.

        • Thus, we retain our BUY rating on the stock

Target Price and Valuation: We value the bank at ~1.7x FY25E ABV and maintain our target price at | 1450 per share.

Key triggers for future price performance:

       • The management has introduced planning cycle - 6 (FY23–26) wherein they have guided for 18-23% YoY credit growth, mainly driven by retail (55-60% proportion) and PPOP margins to be 5.25-5.75%

       • Focus on new business verticals (home loan) to aid business growth and gain market share. Uptick in NIMs led by higher share of retail loans including micro-finance segment

        • Ramping up phygital distribution channels to keep CI ratio elevated for couple of quarters. However, improvement in credit cost will boost earnings growth and return ratio

Alternate Stock Idea: Besides IndusInd, in our coverage we also like Axis Bank.

     • Strong liability profile with healthy capitalisation makes the bank well placed to accrue earnings growth momentum. Healthy provision cover provides comfort on smoother earnings trajectory

     • BUY with a target price of | 1100

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