IndusInd keeps 'buy' tag after disappointing Q2 results' bring down stock

Most analysts expect the bank to return to stronger margins and optimise lending portfolio

IndusInd Bank is among largecap companies that have been punished after posting disappointing earnings in the September quarter.

 

The private sector lender's stock slumped 19 per cent – the most in four years – on October 25 after the higher provisions it made for slippages in the microfinance (MFI) portfolio dragged net profit down 40 per cent from the year before. In the past two weeks, the stock has languished around Rs 1,060 levels amid weakness in the overall markets due to incessant selling by foreign portfolio investors.

 

Year-to-date, IndusInd shares are down 34 per cent even as the Nifty Bank index has gained 8 per cent.

 

Given the underperformance, many wonder if IndusInd Bank is a good buy? If the target price set by analysts goes up, the stock can offer a 40 per cent upside from current levels.

 

The consensus 12-month target price for the stock compiled by Bloomberg is Rs 1,489 per share as against its current price of Rs 1,060. The stock has 37 'buy' ratings, (down from 43 before September quarter results), 11 'hold' (up from 5) and 2 'sell' ratings (up from 1). Before the results were announced, the consensus price target stood at Rs 1,750.

 

Foreign brokerages are more bullish about IndusInd Bank, with Citi, CLSA, Macquarie and BNP Paribas setting target prices upwards of Rs 1,600 by citing favourable risk-reward.

 

Macquarie has an 'outperform' rating on the stock as it believes "valuations are cheap" at just 1.2 times its estimated book for FY26. The brokerage believes for IndusInd to see a sustainable re-rating, it will have to scale back on riskier MFI lending.

 

While most analysts have trimmed InduInd's loan growth and earnings estimates, they say the worst could be priced in. 

 

"We reduce earnings by 29/20 per cent for FY25E/26E (estimated) to factor net interest margin compression and higher credit costs. We now forecast return on assets of 1.3 per cent/1.5 per cent and RoEs [return on equity] of 11.1 per cent/ 13 per cent for FY25E/26E, respectively for IndusInd Bank. Swifter than anticipated normalisation of microfinance asset quality is an upside risk to earnings," said JM Financial in a note. The brokerage has a 'buy' rating on the stock with a target price of Rs 1,380.

   

"Factoring in slower growth, fees, and higher LLP (loan loss provision), we cut earrings for FY25/26/27E by 17 per cent/ 10 per cent / 3 per cent. We cut our target price to Rs 1,650 from Rs 1,800, valuing the bank at 1.8x Sep-26E adjusted book value. However, we retain BUY on the stock given its cheaper valuation and expected steady improvement in RoA (return on assets) to 1.8 per cent in FY27E from 1.4 per cent in FY25E, led by better margins benefiting from the rate-cut cycle and contained LLP," said Emkay in a note.

 

Jefferies said it expected the pressure of weaker asset quality and provisioning to continue in the second half of FY25, with moderation anticipated in FY26-27.

 

Most analysts expect the bank to return to more stable margins and asset quality path over the medium term after optimising its lending portfolio.