‘Do not see an imminent recovery’ Emkay replaces IndusInd Bank with PFC in its model portfolio

Emkay Global Financial Services has removed IndusInd Bank from its model portfolio, citing uncertainty over leadership and the fallout from the recent derivatives accounting issue. The domestic brokerage replaced the private lender with Power Finance Corporation (PFC), highlighting its attractive valuation and its potential to benefit from the firm’s bullish outlook on the power sector.

Emkay Drops IndusInd Bank, Adds Power Finance

In a recent update, Emkay Global announced that it no longer holds IndusInd Bank in its model portfolio, despite the stock’s steep correction. The brokerage expressed concerns over the ongoing derivatives misstatement controversy and the bank's leadership stability.

"The prevailing valuations of IndusInd Bank probably over-discount the negatives, but we do not see an imminent recovery. With banks, we believe it is better to enter at a higher valuation when risks are more compressed and sacrifice some upside than go bottom fishing," Emkay stated.

As a replacement, Emkay introduced Power Finance Corporation, citing its compelling valuation at one-time price-to-book value. The brokerage believes this addition offers greater exposure to the power sector, which it views as a high-growth space.

What Triggered the Removal?

The decision follows IndusInd Bank’s disclosure of a financial misstatement related to derivatives on March 10. The bank revealed that the estimated impact of the accounting error amounts to 2.35 percent of its net worth, translating to approximately ₹1,577 crore.

The revelation led to a sharp sell-off, with the stock plunging 27 percent on March 11, erasing nearly ₹20,000 crore in market capitalisation. The bank was subsequently added to the Futures & Options (F&O) ban list.

However, the stock showed signs of recovery after the Reserve Bank of India (RBI) reassured customers about the bank’s stability. The RBI confirmed that IndusInd Bank remained “well-capitalised” and directed the lender's board to implement remedial measures.

In a March 15 statement, the RBI clarified:

“The Reserve Bank would like to state that the bank is well-capitalised and the financial position of the bank remains satisfactory.”

IndusInd Bank’s CEO and Managing Director, Sumant Kathpalia, revealed that the accounting lapse was detected between September and October 2024. The bank provided a preliminary update to the RBI last week, with the final impact assessment expected by early April 2025, following an external review.

Brokerage Reactions

Emkay Global acknowledged its previous bullish stance on IndusInd Bank, which was part of its model portfolio and a top pick for CY25. However, the brokerage described the derivatives loss as “a setback to management credibility.”

According to Emkay, the issue stemmed from improper hedging treatment of forex portfolio transactions. The brokerage noted that the bank applied different standards to each leg of the internal trade, which effectively overstated its net interest income (NII) over an extended period.

ICICI Securities maintained a ‘reduce’ call on IndusInd Bank with a target price of ₹850. The brokerage estimated a pre-tax hit of ₹20–21 billion from the derivatives issue. ICICI Securities warned that the impact, likely to be routed through the P&L in Q4FY25, could significantly dent profitability, potentially leading to a quarterly loss.

Nuvama Institutional Equities also downgraded the stock to ‘reduce’ from ‘hold’, lowering the target price to ₹901. The brokerage flagged concerns over the bank’s credibility, highlighting the CFO’s resignation just before the Q3 earnings release, the CEO’s recent one-year extension instead of three, and the timing of the derivatives controversy.

Stock Price Trend

The stock has declined over 58 percent from its all-time high of ₹1,576, recorded in April 2024. It recently hit a 52-week low of ₹605.40 earlier this month. Over the past year, the scrip has plunged 55 percent. In March alone, it has shed 34 percent so far, following a flat performance in February. Notably, the stock had gained 3.2 percent in January.

Emkay Global’s decision to drop IndusInd Bank from its model portfolio underscores the mounting concerns over the bank’s internal controls, leadership stability, and the financial hit from the derivatives controversy. The brokerage’s move to add Power Finance Corporation instead signals a preference for safer, value-driven bets with exposure to the power sector, which it believes offers stronger growth prospects.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.