JM Financial: IndusInd Bank: Raise Target to Rs 310

Ammunition for growth
􀂄 Superior fundamentals, adequate capital position for next phase of growth:
IndusInd raised `11.7bn through QIP by issuance of 50mn shares (dilution of
12.2%) at a price of `234.55. New capital would support continued strong
momentum of the bank. The bank has witnessed impressive turnaround in its
fundamentals in the last two years with the management further raising targets
to attain CASA ratio of 30% and NIM of 3.5%. Capital raising, on the back of
superior fundamentals, gives further confidence in the rapid expansion plan of
the bank. It would improve bank’s Tier I ratio to 12.3% for FY11E from the
current 8.7%, adding plenty of headroom for sustainable growth.
􀂄 Management sets sight on achieving scale, plans to rapidly expand branch
network: Having achieved its phase I targets of profitability, productivity and
efficiency one year ahead of schedule, the bank is gearing up for the next phase
where it targets to scale up operations in terms of network and balance sheet
size. The strategy is to achieve liabilities driven growth supported by aggressive
expansion of branch network to 500-700 from the current 224 over the next 3
years.
􀂄 Impressive track record gives greater confidence for future execution:
IndusInd has registered an impressive turnaround with its a) CASA ratio
improving to 24.3% for 1Q11 from 15.7% for FY08, b) reported NIM improving to
3.32% from 1.35%, c) cost to income improving to 49.5% from 67%, and d) gross
NPA declining to 1.26% from 3.04%. Strong fundamentals and a seasoned
management ideally position the bank to become the next big growth story.
􀂄 Raising estimate to factor in dilution and resulting margins impact: We have
revised our earnings estimate upwards by c.7% and c.8% respectively for FY11
and FY12 to factor in the impact of capital raising. We expect calculated NIM to
increase to 3.55% for FY11E, benefiting from new capital inflow, and increase
advances growth estimates slightly to 32% and 28% for FY11 and FY12
respectively.
􀂄 Capital raising to boost further confidence, maintain BUY with increased TP
of `310 (earlier `260): IndusInd has moved into a league of one of the best
banks given its strong fundamentals. Capital raised by the bank gives us further
confidence on the strength and sustainability of the turnaround. We expect NII
to register strong 35% CAGR for FY10-13E driven by 29% CAGR in loan book and
NIM (calculated) improvement by 56bps to 3.55% for FY11E. Net profit and EPS
are expected to show robust CAGR of 37% and 31% respectively for FY10-13E.
We increase our TP to `310 (from `260) as we raise our estimates post
dilution and value the bank at 18x Sept’12 EPS (earlier 15x; implied FY12E
P/BV of 3.1x). BUY