As green shoots emerge all across, confidence returns to IndusInd stock

Positive management outlook post Q2 results has tempted analysts to upgrade their rating

If management commentaries from banks were rated in terms of their confidence, IndusInd Bank would have easily climbed the top spot after its September quarter (Q2) results. For the first time since taking charge as MD & CEO of the bank in March, Sumant Kathpalia spoke about strong green shoots emerging across segments, even for the vehicle finance business. His comforting outlook has not only driven analysts to upgrade their rating to ‘buy’, but also investors to lap up the stock.

The recommendations of the internal working committee of the Reserve Bank of India (RBI) to open up the ownership window for bank promoters from 15 per cent to 26 per cent (final guidelines may be months away) have also boosted investors’ confidence. On the whole, with gains of 58 per cent after the results on October 30, the renewed optimism is neatly captured in the stock price.

So what’s ahead for the bank? Analysts at JM Financial say IndusInd Bank is “turning over a new leaf” and expect the bank's loan book to grow 14 per cent in FY22 and double its net profit, thus strongly recovering from a relatively weak FY21. Vehicle finance, microfinance, mid-corporates, and secured retail loans are expected to drive growth.

While growth has been a concern for IndusInd Bank, the bigger worry is asset quality issues that the lender has been deeply caught in since mid-2018 because of the collapse of IL&FS. Even as slippages or loans turning bad was at its lowest at Rs 400 crore in Q2FY21, and trouble from corporate exposure was negligible, it did not stop analysts at Prabhudas Lilladher from increasing their credit cost estimates to 300 basis points (bps), from 200 bps, for FY21. This is in anticipation of higher slippages in the December and March quarters, once the moratorium is lifted. While the bank has a Covid-provisioning buffer of Rs 2,150 crore, there may be more in the December quarter, as well.

While IndusInd Bank was fast to arrest its run on deposits seen in early months of 2020 and is realigning its balance sheet gradually towards retail loans, its asset quality may remain a dark spot for a while. While the credit cost forecast for FY22 is 150 — 200 bps, analysts haven't changed their forecast of 110 — 130 bps even for FY23, reiterating that its legacy book may continue to throw surprises.

Nonetheless, despite the steep rally, IndusInd Bank’s valuation at 1.1x FY22 book is near-about its 5-year low, which positions the stock attractively for investors.