IndusInd Bank: Buy

A direct proxy to economic growth, banking stocks have been among the biggest gainers in the market rally which started in September last year. The new government is expected to set the ball rolling on stalled projects and hasten the project approval process.

A pick-up in the investment cycle will mean higher credit growth and lower loan delinquencies. While stock prices of most banks have shot up, only those with strong fundamentals are likely to sustain and continue rising. IndusInd Bank (IndusInd) is one such bank. Despite multiple challenges, it has delivered 33 per cent earnings growth in 2013-14 and also contained slippages on its loan book. While its consumer finance business slowed down during the year, it was able to grow its loan book by 24 per cent due to strong growth in corporate loans, mainly working capital financing.

IndusInd, however, is a key player in the commercial vehicle (CV) financing space, which has been impacted by the slowdown in the auto sector. With commercial vehicle financing making up nearly 40 per cent of the bank’s total retail book, a recovery in CV volumes, as industrial growth picks up, will be a key driver of loan growth and earnings. Some of the asset quality pressures seen in this segment are also likely to abate. With an expected earnings growth of 24-26 per cent in the next two years, IndusInd remains a sound bet, notwithstanding the recent run-up in the stock price.

At ₹561, the stock is trading at 2.7 times its one-year forward book value, higher than its historical average of 2.3 times. But strong fundamentals and a likely earnings upgrade from a recovery in CV volumes should continue to drive valuations. The bank is well capitalised (Tier I capital at 12.7 per cent) to drive the next leg of growth. IndusInd has always traded at a premium to ICICI Bank and Axis Bank, as it has been growing much faster. Investors with a two-to-three-year horizon can consider buying the stock.

After the organisational re-structuring in 2008, IndusInd has been focussing on scale as well as profitability. Over the last three years, its loan book grew 28 per cent annually, while earnings grew by 35 per cent annually.

During 2013-14, retail loans, the main growth driver in the past, slowed down considerably. From 30 per cent in 2012-13, loan growth in the retail segment tapered off to 11 per cent in 2013-14. This has led to a shift in loan mix in favour of the corporate segment, which now accounts for 55 per cent of total loans (49 per cent in 2012-13).

Yields on its corporate loans are around 4 percentage points lower than that in the retail segment. Yet IndusInd has inched up its margins by 30 basis points to 3.7 per cent in 2013-14, thanks to lower cost of funds.

The bank managed to bring down its funding costs by going slow on deposit growth, instead increasing its dependence on borrowings. That said, the bank’s low cost current account and savings account (CASA) deposits continued to grow at a healthy 24 per cent in 2013-14 on the back of the bank’s growing retail presence. Over the last three years, IndusInd has more than doubled its branch count. The bank plans to again double its branch network in the next three years.

In 2004, IndusInd acquired the vehicle finance business from Ashok Leyland and emerged as one of the largest CV financiers in the country. The bank has diversified its loan book from medium and heavy CVs to light CVs, used CVs, utility vehicles, two-wheelers and cars. It has been increasing its market share in the vehicle financing business in the last two-three years and is now among the top five in this space. It has also been rolling out new products such as loans against property and credit cards.

In 2013-14, while IndusInd’s commercial financing book declined by 3 per cent, segments such as two-wheelers and car loans, as well as loans against property, grew at a healthy pace.

While IndusInd saw increasing pressure in the asset quality within the CV and construction equipment segment, it was able to contain overall slippages.

The total gross non-performing assets stood at 1.12 per cent of loans, only a marginal increase from 1.03 per cent in 2012-13. Restructured assets as a proportion of loans are at a comfortable 0.33 per cent.

With the CV cycle expected to turn for the better, the stress in the segment should ease in the next 12-18 months.

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