Sensex

Sunday, July 11, 2010

**[investwise]** IDFC SSKI Puts A Buy On IndusInd Bank [3 Attachments]

 
[Attachment(s) from Maverick included below]

IDFC SSKI
IndusInd Bank-Moving Into A New Orbit
 

After a spectacular turnaround, IndusInd Bank is working to gain scale. Marked improvement is evident in operating metrics, and the initial three-year targets have been accomplished in just two years. Now, 'profitability with scalability' is the new mantra with a clear intent to fast-track growth.

 

With focus on fortifying the liability franchise (700 branches by FY13E), we expect 41% CAGR in the bank's earnings over FY10-12. To account for higher loan growth and increasing comfort on asset quality, we upgrade our FY11E and FY12E earnings by 6.8% and 9.4% respectively.

 

While the stock has outperformed the Sensex by a hefty 80% since September 2009, we expect strong growth in earnings as also assets to drive stock performance hereon. In view of RoA expansion of 30bp over FY10-12E to 1.4%, we see stock returns

outpacing the ~25% CAGR in assets.

 

IndusInd Bank remains our top mid-cap pick among financials.

 

Remarkable progress over the last two years: A strong and well-incentivized management has enabled the bank to acquire a strong footprint despite its late entry in the crowded banking space. Over FY08-10, NIMs have surged by 150bp to 2.8%, fee income has grown 85% and cost efficiency has improved (cost to income down from 67% to 51%) – all converging into RoA expansion of 80bp to 1.1% in FY10.

 

Fast-tracking future growth: IndusInd Bank plans to aggressively expand its branch network from 210 currently to ~350 by FY11 and 700 by FY13. A stronger branch network as also liability base in a recovering economy place the bank in a sweet spot to achieve ~30% CAGR in its loan book in next two years – well above the industry average of 20%. Also, NIMs are expected to expand to 3.1% as the liability mix turns

favorable (CASA deposits seen at 28% by FY12) and elevated yields on retail loans.

 

Strong earnings ahead; outperformance to continue: Above-industry loan growth, improving margins, increasing efficiency and lower provisioning costs are expected to drive RoA expansion of 30bp to 1.4% in FY12. Despite the recent re-rating on market cap to assets metric, the stock still trades at a discount of 20%+ to peers. Going forward, on the back of above-industry growth and a consistent rise in RoA, we expect stock

returns to outpace growth in assets.
 
At 2.5x FY12E adjusted book, we reiterate Outperformer.


 
Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
 
Nothing in this article is, or should be construed as, investment advice.
 
 
 

 
 

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Attachment(s) from Maverick

3 of 3 File(s)

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