Strong Q1 builds case for IndusInd's re-rating; 50% upside likely: Analysts

IndusInd Bank Q1 review: For a stronger re-rating, IIB would need to demonstrate decline in stress formation and increase in deposit granularity, analysts said

IndusInd Bank shares surged 9.3 per cent to Rs 961 apiece on the BSE in Thursday's intra-day trade after the lender reported stellar June quarter results on Wednesday. The shares ended 8 per cent higher at Rs 950 as against a 0.51-per cent gain in the benchmark S&P BSE Sensex. 

Analysts see up to 49.5 per cent upside in the stock from current levels, as the bank gets closer to the end of Covid-19 pandemic blues, and the focus gradually shifts to core business performance. Moreover, they see a strong case of stock re-rating in the medium-term.

"IndusInd Bank (IIB) has gone through several challenging episodes in recent years but the bank has been able to navigate them. A re-rating of this bank would be driven by a few quarters of steady performance but the macro environment has not been favorable as yet. The asset driven RoE is less preferred, but we do see that a re-rating is a higher probability from hereon," said Kotak Institutional Equities.

For a stronger re-rating, IIB would need to demonstrate decline in stress formation and increase in deposit granularity, Antique Stock Broking added.

Review Q1FY23

According to ICICI Securities, IndusInd Bank demonstrated 1.7 per cent return on asset (RoA), and 13.4 per cent return on equity (RoE) in Q1FY23, thereby, reaffirming their confidence that the bank would be able to deliver over 5 per cent pre-provision profit/loans, 1.7 per cent/1.9 per cent RoAs, and 15 per cent/16 per cent RoEs by FY23/FY24, respectively. The brokerage has maintained 'BUY' with an unchanged target price of Rs 1,420 per share.

IndusInd Bank on Wednesday reported a 64.4 per cent YoY rise in its standalone net profit to Rs 1,603.29 crore during Q1FY23, led by a healthy increase in net interest income. Sequentially, IndusInd Bank's net profit rose 17.8 per cent from Rs 1,361.37 crore in January-March.

The private bank's net interest income registered 16 per cent YoY/4 per cent QoQ growth to Rs 4,215 crore. IndusInd Bank's net interest margin clocked in at 4.21 per cent for the period under review, against 4.06 per cent a year ago, and 4.20 per cent in January-March.

"IIB's operating performance remains on track led by healthy NII growth and controlled provisions. The management is guiding for continued loan growth momentum driven by steady trends across both consumer and corporate businesses. Healthy provisioning in the MFI portfolio, and contingent provisioning buffer of 1.2 per cent of loans will enable a sharp decline in credit costs, thereby driving sharp recovery in earnings," said Motilal Oswal Financial Services. 

The brokerage estimates PAT to grow at 35 per cent CAGR over FY22-24 leading to 15.2 per cent RoE in FY24. It maintains a 'BUY' rating with a target of Rs 1,300.

Analysts believe the near-term headwinds are manageable as the interest rate cycle begins reversing. "Low interest rates have, historically, hurt the bank given its higher reliance on wholesale deposits. Further, the bank would step up investments in business leading to higher operating expenses growth. We see RoEs at ~15 per cent in the medium term despite the bank having a higher yielding asset book that is likely to enter into a period of benign credit costs," said Kotak Institutional Equities.

That said, analysts caution against high gross slippages, which continued to remain elevated at 4 per cent, emerging from the consumer financing portfolio. This, they said, suggested sustained retail portfolio instability.

"Despite gradual pick-up in growth, the underlying asset quality trends indicate a portfolio that is yet to stabilise. We opine that IIB is likely to find it difficult to achieve the combination of high portfolio growth and stronger profitability vectors," said HDFC Securities. It maintains 'REDUCE' with a target of Rs 953.