Indian Bank - Raise PO on strong 2Q earnings; positive risk-return :: BoA ML

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Indian Bank
Raise PO on strong 2Q
earnings; positive risk-return
􀂄 Raise PO to Rs355 on improving asset quality; risk-return
We are raising our PO to Rs355, post 2QFY11 results. The stock has rallied by
+21% in past 3 months, but has U/p peer banks by +5-6% and more importantly,
in our opinion, the risk return still looks very attractive. We consider that the worst
is behind Indian Bank as regards asset quality (NPL formation down +60% qoq),
key concerns. Further, we estimate earnings growth of +14/30% in FY11/12 (core
growth at 22% in FY11) owing to better topline. RoAs at 1.7% in FY12; RoEs at
+24%. Hence, using our preferred Gordon model, stock can trade up to at least
+1.8-1.9x FY12 adj. BV (target PE of <7x).
2QFY11: Earnings growth 5% ahead driven by topline
Indian Bk reported earnings of Rs4.2bn, up 12% yoy (5% ahead of est.), as
topline grew 38% yoy (5% ahead) owing to 30% volume growth and margins
expanding +25bps yoy (5bps qoq). Core fee up ~25% yoy. NPL formation down
+60% qoq to Rs3.3bn (incremental slippages from agri, education and trading);
headline gross NPLs down 9% qoq and net down 1%; provision cover at +83%.
Indian Bk’s restructured book at Rs53bn (7.6% of loans), with slippages to NPLs
at only Rs320mn in 2Q; cumulative slippages to NPLs at 7.5%. Tier 1 at +11.3%.
Up earnings by 3/2% for FY11/12 capturing better topline
We have increased our earnings by 3/2% for FY11/12 to capture the better than
estimated topline growth driven by rising margins and volume growth holding-up
(improving LDRs). While we forecast headline earnings to grow at only ~14% in
FY11, core earnings (operating profits, ex treasury) should grow by 22% yoy in
FY11. For FY12 we expect earnings growth of 30% yoy, with RoA up to 1.7% in
and RoE at +24%.