IndusInd Bank is flush with capital. Now investors want it to fuel growth
MUMBAI: Actions of IndusInd Bank have gained an impressive 18.7% so far in 2021, topping the sector index and even heavyweights such as HDFC Bank. The rally was fueled in part by liquidity, but a big push also came from the expected money that promoters would pump into the lender.
The bank promoters brought in the funds pledged last week and increased its stake to 15% from 13% by putting in Rs 2,021 crore by converting their warrants into shares. At Rs 1,709 each, the promoters appear to have awarded around Rs 1,29,000 crore to IndusInd Bank. Market value is less than approx. ??80,000 crore to date.
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The market value is not far to this day. In fact, analysts still think valuations are modest. Those of Jefferies India Pvt Ltd maintained their buy rating with a target price of Rs 1,300 per share. “We are building the conversion of warrants into forecasts – results in a 5% increase in capital and 3% in book value per share. We reiterate our call to buy with a target price of Rs1300 (from Rs1100) based on 2 times the adjusted December 22 PB (price-accounting ratio), ”the brokerage said in a note dated February 17.
The infusion of a premium of 60% of the prevailing market price sent a signal not only on the valuation but also on the commitment of the promoters. Having said that, what matters now is how the funds are used by the lender.
This brings us to IndusInd Bank’s financial performance and expectations for fiscal 22. The December quarter lender’s metrics encouraged investors due to improved asset quality and upbeat management commentary. . Gross bad debt does not appear to have increased much and potential stress should be limited, according to management.
What investors want now is for the bank to use its capital and show growth. The December quarter showed encouraging signs on this front. Management expects the loan portfolio to increase by 15-18% in FY22-23, which would be an improvement over the low single-digit growth recorded in FY20-21. The commercial vehicle vertical, which constitutes the bank’s key portfolio, is also showing a smart recovery. In short, the capital of IndusInd Bank will go more to the growth of the balance sheet than to the provisioning and this bodes well for profitability.
But here’s a caveat. The 1.8% restructured loan pile is one of the highest among banks. HDFC Securities Ltd analysts believe this is a sign that stressing will take time to resolve. In addition, the business loan portfolio continues to contribute more to stress. “With the overhaul on both sides of the balance sheet, we expect the return on equity to normalize will take longer and maintain our REDUCE position with a target price of INR 749,” said a note from HDFC Securities dated February 1.
The promoters of IndusInd Bank have shown their confidence in the lender. Investors also seem to side with promoters. But it would be good for investors to keep an eye out for stress.
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