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Suresh Krishnamurthy

FRESH investments can be considered in the stock of IndusInd Bank. Exposure to IndusInd Bank can be had preferably by buying into the stock of Ashok Leyland Finance, which is going to be merged with IndusInd Bank. Buying the NBFC stock can reduce the cost of acquisition to Rs 48.50 per share compared to the ruling price of Rs 52 for the IndusInd Bank stock. The swap ratio is nine shares of IndusInd Bank for every four shares held in Ashok Leyland Finance.

The stock's valuation is now attractive trading at a price to earnings multiple of less than seven times its expected post-merger per share earnings. In terms of price to book value, too, the valuation is modest at about 1.25 times, one of the lowest among private sector banks. The dividend yield of the stock is also likely to be attractive at about 4 per cent. The bank is also on a restructuring mode to fast track growth. Plans to expand the network of branches to catalyse growth also augur well.

In addition, there is also the possibility that the promoters would increase their stake through the secondary market route. The limit for foreign direct investment in private sector Indian banks was recently increased to 74 per cent. As the holding of the Hinduja Group is reckoned as foreign holding, a stake increase is possible. The resultant liquidity would lead to price gains in the short term.

IndusInd Bank is not one of the fastest growing private sector banks. It has had to face worries such as low growth, higher cost of funds and higher incidence of bad loans. The bank is now addressing these issues. Growth in core operating income in the first nine months of 2003-04 is impressive. Net profit growth in the first nine months for the consolidated entity of IndusInd Bank - Ashok Leyland Finance rose more than doubled, primarily boosted by the bank's performance. The growing demand for retail loans will also help the bank to report better growth numbers in the next fiscal.

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