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IndusInd Bank is flush with capital. Now investors want it to fuel growth

At Rs1,709 apiece, promoters seem to have ascribed a about Rs1,29,000 crore for IndusInd Bank. (Photo: Mint)
At Rs1,709 apiece, promoters seem to have ascribed a about Rs1,29,000 crore for IndusInd Bank. (Photo: Mint)

  • What investors now want is for the bank to use its capital and show growth. The December quarter has shown encouraging signs on this front. The management expects the loan book to grow 15-18% over FY22-23 which would be an improvement from the low single digit growth recorded in FY20 and FY21

MUMBAI: Shares of IndusInd Bank have gained an impressive 18.7% so far in 2021, outpacing sector index and even heavyweights such as HDFC Bank. The rally has been partly fuelled by liquidity but a large push has also come from the expected money that promoters would infuse into the lender.

The bank’s promoters brought in the promised funds last week and increased their stake to 15% from 13% by putting in Rs2,021 crore by converting their warrants into shares. At Rs1,709 apiece, promoters seem to have ascribed a about Rs1,29,000 crore for IndusInd Bank. The market value is lower at around 80,000 crore as of today.

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The market value is not far off as of today. In fact, analysts still believe that valuations are modest. Those at Jefferies India Pvt Ltd have maintained their buy rating with a target price of Rs1,300 per share. "We build the warrant conversion into forecasts - drives 5% lift to capital and 3% to book value per share. We reiterate our BUY call with target price of Rs1300 (from Rs1100) based on 2 times Dec-22 adjusted PB (price-to-book ratio)," the brokerage said in a note dated 17 February.

The infusion at a 60% premium of the prevailing market price has sent a signal on not just valuation but also the commitment of the promoters. That said, what matters now are how the funds are put to use by the lender.

That brings us to IndusInd Bank’s financial performance and expectations for FY22. The lender’s December quarter metrics did cheer investors because of improved asset quality and sanguine commentary from the management. Gross bad loans don’t seem to have risen much and potential stress is expected to be limited, according to the management.

What investors now want is for the bank to use its capital and show growth. The December quarter has shown encouraging signs on this front. The management expects the loan book to grow 15-18% over FY22-23 which would be an improvement from the low single-digit growth recorded in FY20 and FY21. The commercial vehicle vertical which is the bank’s key portfolio is also showing a smart recovery. In short, IndusInd Bank’s capital would go more towards balance sheet growth than provisioning and that augurs well for profitability.

But here is a note of caution. The pile of restructured loans at 1.8% is one of the highest among banks. Analysts at HDFC Securities Ltd believe this is a sign that stress resolution would take time. Further, the corporate loan book continues to contribute more to stress. “With both sides of the balance sheet being re-engineered, we expect return on equity normalisation to take longer and maintain our REDUCE stance with a target price of INR 749," said a HDFC Securities note dated 1 February.

IndusInd Bank's promoters have shown their faith in the lender. Investors too seem to side with the promoters. But it would be good for investors to keep one eye out for stress.

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