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India Equity Research Reports, IPO and Stock News
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Action: Initiating coverage with BUY and a TP of INR 325
We like IIB’s robust earnings trajectory driven by loan book mix of vehicle
finance and short-term working capital loans, improving deposit franchise,
low loan-loss provisions and track record of management.
Loan book mix ensures high yields & loan growth is CV cycle
agnostic; we expect NIMs of 3.4-3.5% for FY12-13E
We expect IIB to grow its loan book at 26-27% in FY12-13E. Contrary to
market expectations, IndusInd Bank has demonstrated that its loan book
growth (especially the vehicle finance book) is secular and is not linked to
the volatility in the CV cycle. We like the judicious mix of high yield vehicle
finance loans and short-term corporate working capital loans, which
should ensure high yields through interest rate cycles.
Expanding branch network, product suite and liability franchise, fee
income set to surprise
CASA should grow at 32% for FY12-13E driven by a CASA per branch
CAGR of 23% and branch network of 400 (by FY12E). A wider product
suite, which is being rolled out across the expanding network, should
ensure a fee income CAGR of 28% for FY12-13E. Our LLP forecast of
70bps is conservative and we could see upside risk to our numbers.
Valuation: IIB currently trades at 2.5x our FY13E ABV and 14.7x our
FY13E EPS. Our TP implies 3x FY13E ABV and 17.4x FY13E EPS.
Catalysts: Better traction in the CV cycle driven by a turn in the rate cycle
and higher traction in fee income streams.
Valuation: Initiate with TP of INR325
We expect IIB to grow its loan book at a CAGR of 26% over FY11-13E. We expect this
to drive a revenue and PAT CAGR of 27% and 24%, respectively, over this period. We
expect IIB to record ROA and adjusted ROE of 1.45% and 18.8%, respectively, for
FY13E. IIB currently trades at 2.5x FY13E ABV of INR107.91, 1 standard deviation
above its historical mean of 1.8x one-year forward ABV. At our TP of INR325, the
implied P/ABV for FY13E is 3x. We arrive at our target price of INR325 using a threestage
residual-income valuation method, assuming the following:
• We estimate loan book growth of 26.6% and 26.2% for FY12E and FY13E,
respectively.
• We expect fee income to grow at 26.7% in FY12E and by 27.7% in FY13E.
• We expect NIM to stay flat at 3.4-3.5% for FY12E and FY13E from 3.35% for 2QFY12.
• On the bad loan front, we are building in an increase in GNPLs to INR6.3bn (1.49% of
loan book) by FY13E from INR2.7bn in FY11. We also assume net NPLs would
increase to INR2bn in FY13E from INR728mn in FY11 with corresponding P&L
provisions of INR4.3bn and INR1.9bn respectively.
• IIB currently has a capital adequacy ratio of 14.3% with about 11.4% in tier-1. We are
not building any dilution from capital raising into our model.
• IIB currently has an employee count of 7,008 and we expect an addition of 4,292 new
employees by FY13E. We expect the cost-income ratio to be at 50.1% in FY13E, an
increase from 48.2% in FY11. We expect the cost-asset ratio to rise to 2.77% for
FY13E from 2.51% in FY11.
• We expect a pro forma diluted EPS of INR15.7 for FY12E and INR19 for FY13E. At
2.5x our FY13E ABV of INR107.91 and 14.7x our FY13E diluted EPS of INR18.61, we
believe the stock looks attractive. Our target price of INR325 implies 3x our FY13
adjusted BV (adjusted ROE of 18.8% for FY13E) and 17.5x our FY13E EPS.
Key catalysts: Accelerated monetary policy easing, uptick in the CV cycle and new fee
income streams kicking in strongly are the key upside catalysts.
Key risks: The Reserve Bank of India persisting with a tight money policy, slower-thanexpected
CASA traction and continued global macro uncertainty.
Residual income valuation
We have built the following assumptions into our three-stage residual-income model:
• We expect IIB to post a 22.2% CAGR for its average interest-earning assets over
FY11-14E, compared to an industry average of 17%, on our numbers. We expect this
to be followed by a CAGR of 19.6% over FY14-20E and a terminal growth rate of 4%
beyond that.
• We have modelled for an average ROE of 19.9% over FY12E-20E and a 21% terminal
value ROE. Our discount rates range from 14.85% (current cost of equity) for FY12E-
14E, 12.25% for FY14E-20E and a 10% terminal rate.
• Our book value estimates do not factor any equity dilution.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Action: Initiating coverage with BUY and a TP of INR 325
We like IIB’s robust earnings trajectory driven by loan book mix of vehicle
finance and short-term working capital loans, improving deposit franchise,
low loan-loss provisions and track record of management.
Loan book mix ensures high yields & loan growth is CV cycle
agnostic; we expect NIMs of 3.4-3.5% for FY12-13E
We expect IIB to grow its loan book at 26-27% in FY12-13E. Contrary to
market expectations, IndusInd Bank has demonstrated that its loan book
growth (especially the vehicle finance book) is secular and is not linked to
the volatility in the CV cycle. We like the judicious mix of high yield vehicle
finance loans and short-term corporate working capital loans, which
should ensure high yields through interest rate cycles.
Expanding branch network, product suite and liability franchise, fee
income set to surprise
CASA should grow at 32% for FY12-13E driven by a CASA per branch
CAGR of 23% and branch network of 400 (by FY12E). A wider product
suite, which is being rolled out across the expanding network, should
ensure a fee income CAGR of 28% for FY12-13E. Our LLP forecast of
70bps is conservative and we could see upside risk to our numbers.
Valuation: IIB currently trades at 2.5x our FY13E ABV and 14.7x our
FY13E EPS. Our TP implies 3x FY13E ABV and 17.4x FY13E EPS.
Catalysts: Better traction in the CV cycle driven by a turn in the rate cycle
and higher traction in fee income streams.
Valuation: Initiate with TP of INR325
We expect IIB to grow its loan book at a CAGR of 26% over FY11-13E. We expect this
to drive a revenue and PAT CAGR of 27% and 24%, respectively, over this period. We
expect IIB to record ROA and adjusted ROE of 1.45% and 18.8%, respectively, for
FY13E. IIB currently trades at 2.5x FY13E ABV of INR107.91, 1 standard deviation
above its historical mean of 1.8x one-year forward ABV. At our TP of INR325, the
implied P/ABV for FY13E is 3x. We arrive at our target price of INR325 using a threestage
residual-income valuation method, assuming the following:
• We estimate loan book growth of 26.6% and 26.2% for FY12E and FY13E,
respectively.
• We expect fee income to grow at 26.7% in FY12E and by 27.7% in FY13E.
• We expect NIM to stay flat at 3.4-3.5% for FY12E and FY13E from 3.35% for 2QFY12.
• On the bad loan front, we are building in an increase in GNPLs to INR6.3bn (1.49% of
loan book) by FY13E from INR2.7bn in FY11. We also assume net NPLs would
increase to INR2bn in FY13E from INR728mn in FY11 with corresponding P&L
provisions of INR4.3bn and INR1.9bn respectively.
• IIB currently has a capital adequacy ratio of 14.3% with about 11.4% in tier-1. We are
not building any dilution from capital raising into our model.
• IIB currently has an employee count of 7,008 and we expect an addition of 4,292 new
employees by FY13E. We expect the cost-income ratio to be at 50.1% in FY13E, an
increase from 48.2% in FY11. We expect the cost-asset ratio to rise to 2.77% for
FY13E from 2.51% in FY11.
• We expect a pro forma diluted EPS of INR15.7 for FY12E and INR19 for FY13E. At
2.5x our FY13E ABV of INR107.91 and 14.7x our FY13E diluted EPS of INR18.61, we
believe the stock looks attractive. Our target price of INR325 implies 3x our FY13
adjusted BV (adjusted ROE of 18.8% for FY13E) and 17.5x our FY13E EPS.
Key catalysts: Accelerated monetary policy easing, uptick in the CV cycle and new fee
income streams kicking in strongly are the key upside catalysts.
Key risks: The Reserve Bank of India persisting with a tight money policy, slower-thanexpected
CASA traction and continued global macro uncertainty.
Residual income valuation
We have built the following assumptions into our three-stage residual-income model:
• We expect IIB to post a 22.2% CAGR for its average interest-earning assets over
FY11-14E, compared to an industry average of 17%, on our numbers. We expect this
to be followed by a CAGR of 19.6% over FY14-20E and a terminal growth rate of 4%
beyond that.
• We have modelled for an average ROE of 19.9% over FY12E-20E and a 21% terminal
value ROE. Our discount rates range from 14.85% (current cost of equity) for FY12E-
14E, 12.25% for FY14E-20E and a 10% terminal rate.
• Our book value estimates do not factor any equity dilution.
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