Having successfully completed Phase I of its growth strategy, the management team at Indusind Bank (IIB), led by Mr. Romesh Sobti, is ready with the Phase II line up. Driven by a network expansion-led CASA improvement and newer avenues of fee income, we expect the bank to deliver 25% CAGR in earnings (one of the highest in our universe) supported by best-in-class return ratios. We initiate coverage with ‘BUY’ with TP of INR380 (valuing at 3.2x FY13E book-15% discount to HDFC Bank).
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Focus on improving key metrics inspire a successful turnaround
After taking charge in FY08, a well incentivised management team orchestrated a successful turnaround by focusing on improving vital profitability metrics like CASA, NIM, cost to income and asset quality. Key return ratios—ROA and ROEs—witnessed a significant scale upfrom 0.36% and 7% in FY08 to 1.6% and 19%, respectively, in FY12.
Phase II: Core profitability to rise on network-led expansion
Led by a branch network expansion (to 650 by FY14) and saving bank deregulation, we expect IIB to scale up CASA from 27% to 33% by FY14E, drawing a parallel to the success stories of HDFC Bank and Axis Bank in their initial phase. Given the expanding fee income portfolio, credit cards, mortgage origination and government business, we expect the revenue stream to grow faster than the balance sheet, bolstering the core profitability. Such a faster-than-industry growth will also catapult IIB to the top league of Indian banks.
Outlook and valuations: Earnings growth; initiate with ‘BUY’
We expect IIB to report 25% earnings CAGR, supported by best-in-class return ratios (ROA inching up to 1.7% by FY14E). The bank has entered a successful chain of growth, raising capital at every stage at richer valuations to fund its expansion. The stock is trading at 2.8x FY13E adjusted book, a vindication of its improving return ratios and asset quality. We believe the next leg of re-rating will come from improving liability franchise which will narrow the trading gap to the leader HDFC Bank. We initiate coverage with ‘BUY/Sector Outperformer’.
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