IndusInd Bank likely candidate for rerating after Q4 profit surge of 46%

• IndusInd Bank’s shares gained on Tuesday after the lender’s Q4 performance cheered investors.
  
• Analyst consensus says that the lender is back on the growth trajectory after underperformance between FY20-22.
  
• Post the Q4 performance, analysts have a bullish outlook and maintain that the near-term trends are ‘comfortable’.
  

IndusInd Bank’s shares surged on Tuesday after the private sector lender reported a robust set of numbers in Q4, with its net profit rising 46% YoY to ₹2,043 crore, driven by lower provisions. Thanks to a robust Q4 performance, in conjunction with good asset quality and the lender’s focus on governance and growth, analysts say the bank is ripe for a re-rating.

IndusInd Bank’s shares gained nearly 2% in morning trade on Tuesday, extending the lender’s positive run over the last one month, which has resulted in the stock rising by nearly 11% in the last one month. Despite this, the stock is down nearly 9% in 2023 so far.

With Q4 results now in, analysts are largely bullish on the stock. “With asset quality concerns behind, credit costs declining, growth bouncing back to above-industry average and probability of the cost of funds peaking sooner, we believe the bank is well-positioned for a re-rating from current levels,” said the analysts at Kotak Institutional Equities.

All in all, an average of brokerage estimates suggests there is a 28% upside to the IndusInd Bank stock in the next 12 months, with an average target price of ₹1,431, as compared to the current market price of ₹1,120 per share. “Currently, stock is trading at attractive valuations of 1.5x FY25 estimated book value and hence makes for an attractive entry point,” said a report by JM Financial.

IndusInd Bank’s Q4 net interest income rose 17% YoY to ₹4,669 crore, while its net interest margins also expanded to 4.28% in Q4 from 4.2% a year ago. The lender also saw healthy momentum in both loan and deposit growth – its loan book grew 21% YoY to ₹2.9 lakh crore, while deposits grew 15% to ₹3.36 lakh crore.


Source: Company reports

Growth rebounds after two years of slowdown

IndusInd Bank has found its feet again after two years of challenging business environment and governance-related issues. For context, IndusInd Bank had disclosed in December 2021 earnings that loans were disbursed without recording the consent of clients due to a technical glitch.

While the impact of this incident was estimated to be ₹13.5 crore, it underlined a serious governance issue. The lender’s CEO Sumanth Kathpalia received a lower extension from the Reserve Bank of India (RBI) than what was ratified by IndusInd Bank’s board. This did not go down well with the investor community.

While those issues and other concerns suppressed its earnings between FY20-22, IndusInd Bank has now “recovered to better-than-industry average” returns, according to Kotak Institutional Equities.

The lender also outlined its strategy for the next three years, focusing on the growth of retail deposits, expanding its branch network, improving its digital banking services, among other things.

IndusInd Bank also reported stable asset quality, with gross non-performing assets (NPA) falling to 1.98% in Q4 from 2.27% a year ago, and net NPA falling to 0.59% from 0.64% in the same period.

Analysts bullish, re-rating on the cards

Healthy performance across different metrics like loan and deposit growth and asset quality improvements have resulted in brokerages being bullish on IndusInd Bank’s prospects.

“Retail book is showing strong momentum, while the microfinance business has also picked up sequentially. The corporate book is growing at a healthy pace,” said a report by Sharekhan, adding that the near-term outlook is stable-to-positive.

According to analysts, credit costs will edge lower thanks to IndusInd Bank’s adequate provisioning for bad loans. With cooling credit costs on the horizon, the next three-year strategy outlining the lender’s growth plans and current stock price being an attractive entry point, the outlook for IndusInd Bank looks healthy.

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