Indusind Bank: Q2FY16 Is Largely In Line With Street Estimates

  • Stock Market Analysis

Q2 PAT at Rs.560 cr, up by 30% (YOY) against median street estimates of Rs.558 cr Reported Q2EPS 9.40 against consensus of 10.48 & Q1EPS 9.74

Expect fireworks in IIB only above 970-995 area for 1050-1150; otherwise it will come down.

The bank may cuts its base rate "significantly" as par RBI's new "marginal cost of funds" methodology shortly.


CMP: 963
Sell: 980-990
TGT: 930*-901-878-835 (1-3M)
TSL>1005

Note: Consecutive closing above 1005 for any reason, IIB may target 1050-1150 (1-12M) and investors/traders may buy back the stock in that scenario; otherwise wait for dips around 901-878 to enter the stock again (if it sustained below 930).

Some key takeaways & rationale:


Q2FY16 result of IIB is largely in line with market estimates and quite excellent supported by higher NIM and other income (distribution fees, treasury etc).

On NPA front, the bank has also done well, but it doubled its provision (YOY) mainly on account of its newly acquired diamond & jewellery financing business from RBS (L: RBS ) (loan portfolio of around Rs.4100 cr).

After the recent spate of fund rising through QIP & preferential allotment for around Rs.5081 cr, IIB has reached the desired capital adequacy ratio to around 16.52% and the bank may not raise any further capital for the next three years. But it appears that the above capital infusion has somehow dented its EPS in Q2 and the bank has to support it with sequentially higher bottom line in the coming quarters.

The bank is also going big on digital banking and exploring various opportunities to tie-up with a payment bank, including taking an equity stake as this may improve its CASA ratio and online banking convenience.

Recently the bank has also ties up with TATA AIA Life Insurance to distribute its insurance policy as previous agreement with Aviva (L: AV ) ended. It seems that Aviva fund performance was not so impressive either and being one of the most trusted & respected group, "TATA" brand may help its other income to grow sequentially higher in the days ahead.

IIB is also doing well in in CV segment, specially trucks amid lower cost of fuels and improved demand scenario. Going ahead we may see sequentially higher volume in CV-Taxi segment in the age of OLAS & UBERS (Cabs).

The bank is also expanding its branches very fast. It opened 43 branches during the last quarter and aimed to have 1000 pan-India branches by FY-16 from its present 685 branches. Considering the likely competition from new banking entrants (full & partial), all private banks may take this path of expansion of retail reach and we should not fire only DCB for this !!

IIB also emphasizing more on high margin retail lending and planning to make it up to 50% from present level 0f 41% by FY:16.

IIB may be also looking to foray into direct stock broking business in the future either by organic or inorganic way.

IIB off late are taking some risks by extending more corporate loans, given the overall tepid economic recovery and average earnings are sluggish, but higher fees income from this segment are helping its other income a lot.

Overall, around 25% of IIB's loan book is comprised of some risky loans such as loan against property (LAP), unsecured loan, exposoure to microfinance, construction, commercial reality, real estate etc. Any slow down in real estate may affect its NPA.

But having said that, almost all the banks carries such risks more or less and due to "Smart City Theme" , "Housing For All" thrust by our Govt, and expected 7-th pay commission induced liquidity, we may not see significant slowdown in our reality market in the coming days.

Going ahead, Bandhan bank (new full banking entrant) may pose major competition in retail sectors, SME & micro finances in the banking industry and as par reports, Bandhan is on a poaching drive for key branch personnel in various levels of other Banks to grab their retail business shares, specially in rural & semi urban areas of NE India.

IIB may shortly announce for a suitable/significant cut in its lending base rate/PLR ("Festival Dhamaka") followed by RBI repo rate cut last month as it shifts to marginal cost of funds as suggested by the central bank.

Presently, base rate of IIB is 10.85%, which is significantly higher than its peers and it follows some hybrid model of calculation for its base rate (average cost of funds + marginal cost of funds) and take MSF window of RBI for its short term funding need.

No doubt, IIB is a bright spot in private banking space. But time & price is the ultimate for any stock. Going by the price action, the scrip may be already discounted by the market to a great extent. IIB rallied more than 200% for the last two years against broader market rally of around 60% for the same period. It also rallied quite nicely along with the market from its mid June low level of 785.

Going forward, IIB may not outperform the broader market ( Nifty / Bank Nifty ), unless there is a fresh trigger in it (like unexpected CRR/SLR/MSF cut by RBI to boost Festival Loan demands for another "Diwali Gift" to the nation !!) or an exceptional "well above estimate" Q3FY16 result.

As 970-995 zone is historically a strong technical supply zone for IIB, selling pressure may emerge in it at some rallies as risk reward ratio is quite favorable.

Also, current PE of IIB is around 28, which is significantly higher than its peers. Although it a consistent "30% (YOY) performer" in nearly all its revenue top line, some moderation in its high PE may happen.

"Significant" base rate reduction amid RBI's new method of marginal cost may be one of the laggards for IIB scrip in the days ahead and on dips, 878-835 zone may be a good buying zone for investment purpose as par the current market scenario.

As par BG metrics and current market parameters:

Present median valuation of IIB may be around: 890 (FY:15)

Projected fair valuations might be around: 970-1110-1265 (FY:16-18)


Analytical Charts:







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