Is the sell-off in IndusInd Bank stock a buying opportunity?

While most analysts remain positive, institutional attitude will be crucial

The complaint by a whistle-blower alleging irregularity in IndusInd Bank’s MFI subsidiary, BFIL (Bharat Financial Inclusion), took the market by surprise. The stock dropped by nearly 11 per cent as the bank’s management addressed allegations in a concall, dismissing them as baseless. While IndusInd Bank denied the allegations that it was evergreening loans from BFIL, it did acknowledge that a “technical glitch” had led to over 84,000 MFI loans being sanctioned without customer consent in May 2021.

It said that over 26,000 of these loans were still active with an exposure of about Rs 34 crore, which is about 0.1 per cent of the outstanding MFI (microfinance) book. These are provisioned for, according to IndusInd Bank. The bank also denied allegations that senior management in BFIL had resigned. It has initiated an independent review of BFIL and the RBI review continues.

The MFI book stands at Rs 28,100 crore, which is about 12-13 per cent of the entire outstanding loans. The segment has seen 22 per cent CAGR in the last two fiscals. Collection efficiency, which dropped during lockdowns has now improved to about 94 per cent and apart from some parts of Kerala and West Bengal, MFI loans in the other regions are doing well. The bank believes that it would deliver outperformance in the segment.

In Q2FY22, NPAs in the MFI book stood at Rs 905 crore (about 3 per cent of MFI loans), while the restructured MFI book was at Rs 907 crore (3.2 per cent of MFI loans). The total Special Mentions Account (SMA) within MFI stood at Rs 5,050 crore as of October-end (18 per cent of MFI). The bank expects credit costs to range at 6 per cent to 8 per cent in the MFI segment with growth remaining strong. Activity surpassed pre-covid levels in October 2021.

Despite this adverse news, the management reiterated its guidance as given during the reporting of the Q2, 2021-22 results. Overall, it expects loan growth to be 16–18 per cent and credit cost to be about 160–190 bps, with an additional cost of 50 bps for Vodafone-Idea. Thus, the total credit cost guidance stands at 240 bps.

The adverse newsflow triggered a big sell-off and this could represent either the start of a new downtrend or it may be a temporary phenomenon. In the past year, the stock was up more than 55 per cent, slightly outperforming the sector Index, Bank Nifty (+53 per cent). In the last month, it is down 9 per cent inclusive of Monday’s session – it was up around 2 per cent until the news broke.

Taking all institutional positions together, around 79-80 per cent of the shareholding is held in aggregate by the promoter (15.2 per cent), FPIs (47.2 per cent), Banks and Mutual Funds (9.4 per cent), and other domestic financial institutions (8 per cent). It has a GDR float of 8.2 per cent and other public shareholdings of 6.5 per cent.

While there were high volumes on the sell-off, the institutional attitude will be crucial in the long-term. They will be tracking the MFI portfolio and newsflow with care, and also monitoring any senior management churn.

As of now, most analysts seem to have accepted the management’s claims and reiterated their earlier attitude to the stock. Most seem to have buy and hold recommendations, with target prices in the range of Rs 1,400. Hence, the sell-off could represent an investment opportunity in the medium-term.