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Credit growth to pick up, earnings outlook strong; retaining a Buy

Indusind Bank’s Q2 FY23 profitability improved, with a 1.78% RoA (up 49bps y/y) and better asset quality. Key positives were 1) strong disbursements in the MFI and VF books, 2) strong retail deposit growth, 3) sturdy balance sheet with 72% coverage and a Rs26bn provision buffer (1.1% of loans) and 4) strong liquidity and capitalisation. With credit growth picking up and moderating credit costs, earnings are expected to be strong. We maintain our positive view on the bank with a TP of Rs1,400, valuing it at 1.6x P/ABV on its FY25e book.

Asset quality improves. GNPA decreased 24bps sequentially to 2.1%, driven by lower slippages and higher write-offs. Slippages were Rs15.7bn (2.4% of loans), of which Rs9.9bn stemmed from the restructured book. The restructured book was Rs39bn (down 25.1% q/q). With most of the stress already delinquent/restructured and collections reaching pre-Covid levels, slippages ahead are expected to be moderate.

Strong margins, lower credit cost to drive RoA. Strong credit growth in a rising interest-rate scenario would keep margins near current levels. On strong margins, moderation in operating expenses and the benign credit-cost cycle, profitability is expected to be good.

Credit growth to be robust. As the economic environment improves, strong growth is expected from its MFI and vehicle-finance book in the coming two quarters with credit growth expected to be in high teens.

Valuation. Our Oct’23 Rs1,400 target stems from a two-stage DDM model. This implies a ~1.6x P/ABV multiple on its FY25e book. Risks: Lumpy slippage in the corporate book; volatility in asset quality from the MFI book.

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