IndusInd Bank (IIB) is attractively placed with high collection efficiency, improving traction in loan book growth and improving business fundamentals. The management indicated that overall collection efficiency has improved to 95.5-96% currently and expects collections to inch up further by December. Fee income traction has been weak in H1, but is expected to recover gradually in H2FY21 and the bank expects a steady growth from Q1 FY22. The bank expects FY22E credit growth in the mid-teens with incremental mix tilted towards retail loans. While the bank had focused on balance sheet re-alignment during the first half of FY21. In the second half of FY21, its focus will be on scalability and asset growth (which is coming back in retail, MFI, vehicle and secured asset segments, etc).

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IndusInd Bank has the ability and will outperform industry average growth rate in FY22E and FY23E according to Sharekhan. Deposit growth momentum is accelerating too and the bank which saw a troubled Q4 FY2020, saw healthy growth of 8% qoq in Q2 FY21. While Retail term deposits have grown by over Rs 8000 cr, helped by digital acquisition which is 2x now and physical acquisition is 80% of pre-Covid levels. Sharekhan believes that the improving collections efficiency (CE) is an encouraging trend and the stable CASA share at 40% is positive. Asset-quality performance improved, as GNPA and NNPA ratio declined on a sequential basis to 2.21%/0.52% in Q2 FY2021. The bank’s ‘BBB and below’-rated exposures were well collateralised with five-year average slippage of 0.4% (excluding one large account), which will help contain NPAs.

The bank expects restructuring would be low single digit and so far the bank has not seen any meaningful requests from restructuring. The bank has strengthened its balance sheet by improving its provision coverage ratio to 77% and the recent capital raise has helped the CRAR, with Tier 1 at 15.8%. Going forward, we expect credit cost for FY2021E will be high but manageable and advances growth would be modest. We opine that the bank is in an improved position vis-à-vis its balance sheet and valuations are more reasonable now. Sharekhan recommends a Buy on the stock with a price target of Rs 1000

Call Valuation:

IndusInd Bank currently trades at 1.5x/1.3x its FY2022E/FY2023E book value which is reasonable. The bank’s well-capitalised balance sheet and provision buffer are cushions for profitability. We believe that growth outlook is improving and improving collections efficiency and low expected restructuring pipeline indicate that credit cost is manageable, even though is likely to be elevated for FY2021E. Easing of the lockdowns backed by gradual improvement in the auto industry has led to a significant recovery in stock price in near term.

IndusInd Bank has 52% of retail portfolio largely skewed towards vehicle finance (30% of total loans), MSMEs, unsecured and the MFI portfolio (12% of total loans). Sharekhan have fine-tuned our estimates for FY2022E and FY2023E; and despite the recent stock runup, we believe that the risk reward is still favorable, with the bank still trading at a discount to other Private bank peers. We recommend a Buy rating on the stock of IndusInd Bank with a target price of Rs 1000.

Improving automobile demand augurs well for the bank:

Automobile demand scenario has been improving with sales in most product categories picked up in August-September 2020, moving close to pre-COVID-19 levels. Passenger vehicle (PV) sales for the industry has improved significantly to reach near-normal levels (almost equal to Q2 levels), much improved from the ‘below 30%’ levels in Q1 FY2021. Similarly, two-wheeler and tractor sales have crossed year-ago levels in August and September 2020. A resilient rural economy benefited tractor demand, coupled with a strong Rabi crop. However, the MHCV segment has continued to be a laggard which is yet to reach pre-COVID-19 levels. IndusInd Bank (IIB) has 52% of retail loans of which vehicle loans constitute 30%. The pickup in the Auto industry augurs well for the growth aspect for IndusInd Bank.

Retail credit demand also looking up:

Sharekhan expects that with revert to normalcy; consumer demand would result in improved pick-up in Retail products as well. Already the management has indicated that while In first half of FY21, focus was on balance sheet realignment, now in second half of FY21, the bank will focus on scalability. The bank expects that the asset growth is recovering with retail loans – especially in the MFI, vehicle, secured asset segments seeing increased traction. Due to the bank’s strong retail positioning, we believe that the bank has the ability and can grow above industry average growth in the long term.

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Key Risks:

Rise in slippages and delay in recoveries from stressed corporate loan book and slower growth in retail/MFI loan book may impact earnings.