ICICI Direct picks IndusInd Bank as a ’High Conviction Idea’ for December; here’s why

Domestic brokerage house ICICI Direct has picked banking major IndusInd Bank as its 'High Conviction Idea' for the month of December. The recommendation is driven by the bank's commendable asset quality, successful attainment of targeted business parameters, a thriving momentum in retail growth, and a robust outlook for future expansion.

The brokerage firm has issued a ‘buy’ call on IndusInd Bank, setting a target price of ₹1,800, which implies an upside of 18 percent.

Despite already registering a substantial gain of 24 percent over the past year and a 26 percent surge in the year-to-date performance for 2023, with positive returns recorded in 8 out of the 12 months so far, the stock continues to exhibit strong performance. December alone has seen a 2.5 percent increase, marking the fourth consecutive month of gains.

The stock also achieved its 52-week high of ₹1,538 on December 11, 2023. It has now surged over 55 percent from its 52-week low of ₹990.25, reached on February 1, 2023.

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IndusInd Bank is a Hinduja group promoted newer age private sector bank and is the fifth largest private bank in India. The bank has a full product suite with a strong moat in the vehicle and microfinance business. The bank has a strong presence with a pan India branch network of 2631 branches (2903 ATMs) and a large customer base of 3.7 crore.

Earnings

The private sector lender reported a 22 percent year-on-year (YoY) rise in the September quarter standalone net profit to ₹2,181.5 crore on the back of higher income and lower provisions. The lender reported a net interest income (NII)— the difference between interest earned and expended—of ₹5,077 crore in Q2 FY24, up 18 percent YoY. Its net interest margin (NIM), a key measure of profitability, was unchanged from the previous quarter, at 4.29 percent.

The bank also witnessed a slight improvement in asset quality as compared to the June quarter. Its gross bad loans stood at 1.93 percent of its total advances, down 1 basis point from the preceding quarter. Its net NPA ratio was at 0.57 percent, down 1 basis point from the June quarter.

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Investment Rationale:

Focus on improving granularity on liabilities: As per the brokerage, the lender has strategically enhanced its structural framework with ongoing investments in distribution capacity, digital stacking, and customer acquisition. Current Account Savings Account (CASA) remains stable at 40 percent, and the Liquidity Coverage Ratio (LCR) is approximately 117 percent. Future plans include scaling the branch network to 3250-3750 branches by FY26E.

In terms of liabilities, the bank emphasises digital initiatives and targeting affluent customers, anticipating minimal impact from recent hikes in risk weight. Despite an expected increase in the cost of funds, the bank employs various strategies to maintain a steady margin of 4.2-4.3 percent, noted ICICI.

Retail segment to aid growth: On the retail front, the bank is concentrating on key segments such as micro-finance and auto finance, said the brokerage. Retail segments, including housing and Bharat Shop Super, are being expanded for improved growth and granularity. The brokerage estimates overall credit growth at 18-20 percent in FY24-26E, with a specific focus on the retail segment and an 18.5 percent CAGR in advance growth from FY23-26E.

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Asset quality steady: Asset quality has remained steady with a low percentage of 0.5-0.7 percent. The bank has established an adequate provision buffer, expecting slippages at 1.5-1.6 percent. The annualised credit cost for FY24E is estimated to be in the range of 110-130 bps, with healthy coverage and contingent provisions contributing to maintaining asset quality, predicted the brokerage.

In summary, the bank is strategically aligning its focus on strengthening liabilities, especially in the retail segment, while ensuring steady asset quality and effective management of credit costs. Key initiatives include digitalisation, expanding the branch network, and targeting specific customer segments.

"Improving granularity on both assets and liabilities provides confidence in sustained performance on earnings as well as asset quality. Continued traction in growth with a focus on new age segments, granular liabilities franchise, and lower credit cost is expected to keep RoA at 1.8-1.9 percent in FY24-26E. We assign BUY rating on the stock with a target at ₹1800, assigning a PBV multiple of 1.75x FY26E ABV," said ICICI.

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 taking any investment decision.