Multi Baggers

IndusInd Bank

Overview:

IndusInd Bank is a Private Bank which provides comprehensive Retail Banking, Corporate Banking, Treasury services to various segments in India. As on March 31st 2010 the Bank had 210 branches and 497 ATMs spread over 168 locations in India.  It is a fast growing Bank and comes under the category of mid size Private Bank in the Industry.

Banking sector overview:

The Indian Banking Sector has a very important place in the financial system in India. The sector consists of 3 segments; Government owned banks which account for more than 70% of the industry; Indian owned private banks which represent 25% of the industry and the Indian branches of the foreign banks which represent the balance. Most Indian banks have strong domestic operations and depend on their domestic deposit base for their growth. Considering that India has a savings rate of more than 35% of GDP, the banks have played a major role in using the savings in the Indian economy.  Indian banks are under the supervision of the Reserve Bank of India which periodically sets out the amount of cash reserve they need to keep, the amount to be invested in Government Securities (Statutory Liquidity Reserve) and what can be lent to Industry and Consumers.  Over the last 10 years Indian banking has undergone a dramatic change.  Firstly it has become highly automated with ATM networks spread across the length and breadth of the Country. Secondly Indian banks which used to be traditionally lending to manufacturing sector now have a high percentage of their loans in the form of consumer loans for purchase of homes, consumer durables etc. The future of Indian banks is extremely bright given the low level of penetration of banking as compared to the population.

Financial position:

IndusInd Bank has had an impressive 3rd quarter ended 31st December 2010.  It reported robust 53% growth in Net Interest Income (NII) year-on-year and 10% on sequential basis.  This was made possible by robust loan growth with loan book growth of 31% year-on-year.  Interestingly over the past few quarters the bank has shifted focus towards consumer finance where its yields are very high.  The Net Interest Margin (NIM) went up by 20 bp to 3.61%. The non interest income was also good with traction in investment banking fees.  The CASA ratio increased by 3%. The bank is very well capitalized with Capital Adequacy Ratio (CAR) of 15.6% to some extent boosted by the issue of fresh shares in September 2010.  The NPA level remains stable at 1.21% though it did increase slightly in absolute terms.  The Bank has already reached the coverage ratio of 70% on standard assets as stipulated by Reserve Bank of India well before the target date of 31st March 2011.

Positives:

The bank is on a very strong growth path and has managed to maintain its margins also. It is also very well capitalized and it has got a sound management to backup its expansion plans.

Concerns:

Its CASA ratio of 26.8% is low as compared to some other banks and can potentially prove expensive. Though the asset quality is stable one would like to see a more substantial improvement in NPA position. To some extent this could be because of emphasis on consumer loans.

Valuations & recommendation:

At the current market price of Rs 231.55, IndusInd Bank trades at P/E ratio of around 18 for the FY11.  This compares very favourably with EPS growth of 35% to 40% we expect this year. Apart from this the Price/Book ratio is expected to come down to 2.7 for FY11 and still further to 2.3 in FY12. This is a major improvement on  4.4 for FY10.  We recommend IndusInd Bank as an aggressive pick in the Mid Cap Private Banking space with a target price of Rs 310 in the next one year.
 
Disclosure : The share finds a place in the portfolios of clients who are in the PMS service of P.N.Vijay Financial Services P Ltd and also in the personal portfolios.