IndusInd Bank: Premium valuation to continue

Given the lender's consistent performance, asset quality and strong prospects, analysts remain bullish on the stock

IndusInd Bank has posted 25 per cent plus year-on-year net profit growth over the past 18 quarters in a row with sound asset quality, healthy loan growth and strong increase in fee income. The bank's earnings per share grew 23 per cent in the 12 months ending September 2015, higher than the 11-17 per cent growth posted by other top private banks in the same period.

This has been led by the bank management's well-defined targets on key parameters such as loan growth, CASA proportion, higher fee growth than loan growth, branch network and customer base. Strong presence in vehicle finance (29 per cent of loan book), healthy growth in retail business, both on the asset as well as liabilities side, and efforts to improve brand visibility are among other driving forces.

Not surprisingly, the street has rewarded the stock which has doubled over the past two years. It is up 18 per cent in the last one year.

Notably, the stock has outperformed its peers as well as the benchmark indices across timeframes (1, 3 and 6 months as well as 1, 2 and 5 year periods). It trades at premium valuations of 2.8 times FY17 estimated book value compared with peers such as ICICI Bank, Axis Bank and Yes Bank which are trading between 1.7 to 2 times FY17 estimated book value. This is partly due to asset quality issues in their books in recent quarters.

Though HDFC Bank's valuations have come off from the peak levels, it still trades at 3.2 times FY17 estimated book value, which is at a premium to all its peers. Notably, HDFC Bank has been a favourite for its consistent track record, strong execution skills, larger size and well diversified business model.

Even though HDFC Bank is much larger than IndusInd Bank and hence not strictly comparable, some analysts have started to benchmark it to the former due to their consistent performance and similar business models. "IndusInd Bank is moving in the right direction on most parameters when benchmarked with HDFC Bank. The valuation fairly reflects the execution track record along with the growth and profitability outlook," believes Ravi Singh of Ambit Capital. He adds that IndusInd Bank's fee income has expanded at 34 per cent CAGR over the last three years versus HDFC Bank's 12 per cent.

While IndusInd bank has scaled up its CASA (current account savings account) ratio over the years to about 35 per cent currently, it is still lower than the ratio of most of its peers. Also, intensifying competition, especially from new banks/small banks, may reduce the pace of CASA improvement going forward, say analysts. The bank though targets to double its branch network to 1,204 over FY14-17, which will aid its low-cost CASA deposit franchise.

A key concern the street had was whether its high fee income growth is coming with incremental risk. Vaibhav Agrawal, VP Research - Banking, Angel Broking, says, "Any higher risk is well captured in the bank's risk weighted assets and capital adequacy ratio. IndusInd Bank has done a reasonably good job in credit card segment as well."

Going forward, analysts say the bank will continue to put up a good show on the back of improving credit outlook, strong capital raising ability and strong branch expansion plans. The bank also stands to gain from pick up in commercial vehicles' credit demand given that this segment forms about 16 per cent of its loan book. As a result, most analysts remain positive on IndusInd Bank and believe its premium valuation versus peers should sustain.