Indian Bank Raise PO on 2Q earnings beat and positive risk return 􀂄 BofA Merrill Lynch,

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Indian Bank
Raise PO on 2Q earnings beat
and positive risk return
􀂄 Raise PO to Rs260 on positive risk-return
We raise our PO to Rs260 factoring in +6% 2Q earnings beat driven by topline
surprise. We have also raised earnings by only +4/3% for FY12/13 (earnings
growth at +14/18% in FY12/13), as we normalize credit costs at +70bps (vs.
50bps reported). Risk-return remains positive, with stock trading at +1.1-1.2x
FY12E book / 1.0x FY13E book, with RoEs of still +20/21%, resp. We believe
Indian Bk can trade up to ~1.2x FY13E book owing to healthy return ratios. Our
target multiple is still at a +15% discount to Gordon multiples owing to low stock
liquidity (Govt. owns 80% of stock) and higher exposures to riskier sectors (~20%
of loans to Infra; +4% to textiles).
2Q: +6% beat (adj. earnings) on topline surprise
Indian Bank reported earnings of Rs4.7bn, 13% yoy growth (+15% headline beat)
driven by topline surprise and in part, also owing to int. on IT refund of Rs400mn
(incl. in other income). Adjusted for this, earnings beat of +6%. Topline grew 16%
yoy driven by 24% yoy loan growth and flat margins (up 33bps qoq). Other
income (core) was up +6% yoy. CASA down ~250bps yoy and 75bps qoq to 30%.
Capital remains very healthy, with Tier 1 at ~11% (total at 13.3%).
Asset quality manageable, despite higher qoq slippages
Slippages for Indian Bk increased by +125% qoq (to Rs3.8bn). However, almost
+40-50% of this rise qoq was driven by ~3 corporate / SME a/c’s (Dye unit, Steel
unit and a Hotel), which the mgmt believes will be upgraded in the subsequent
quarters. Owing to higher slippages, headline gross NPLs are up 30% qoq (at
1.2%) and net up 42% (at 0.7%). But provision cover stands healthy at +79%. We
estimate slippages at +Rs11.5bn for FY12 and credit costs at ~75bps.