IndusInd Bank soars 18% on operationally strong Q4; analysts maintain 'buy'

While the asset quality has weakened, its coverage has improved. The profit was above analysts' expectations and was driven by better operational performance.

Shares of IndusInd Bank surged 18.05 per cent intra-day, to hit a high of Rs 480.9, on the BSE on Tuesday after brokerages maintained 'buy' call on the stock due to its better-than-expected operationally strong March quarter performance.

During the day, the bank breached two upper limit circuits,10 per cent (Rs 448.08) and 15 per cent (Rs 468.45), before racing towards the 20 per cent circuit (Rs 488.20). 

At close, the stock quoting Rs 476 apiece, up 16.85 per cent on the BSE. In comparison, the benchmark S&P BSE Sensex ended at 32,114.52 levels, up 371.44 points or 1.17 per cent. Nearly 63.66 million shares changed hands on the counter on the NSE and BSE today.

The stock of the bank had rallied 7.16 per cent in the intra-day trade ahead of its results on Monday. With today's gain, the stock has surged 25 per cent in two days. 

The bank's net interest income (NII) rose 5 per cent sequentially and 45 per cent year-on-year (YoY) to Rs 3,231 crore during Q4FY20. Besides, it logged the highest-ever net interest margin (NIM) of 4.25 per cent, up from 4.15 per cent in Q3FY20 and 3.59 per cent reported during the year-ago quarter. Higher growth in the high-yield retail loan portfolio and refinance of liabilities supported the bank’s top-line growth despite poor growth in loan advances.

Furthermore, the bank's pre-provision operating profit (PPoP) grew 38 per cent YoY to Rs 2,860 crore. For the entire FY20, its NII, PPoP, and net profit grew 36 per cent, 34 per cent, and 35 per cent YoY, respectively.

ALSO READ | IndusInd Bank's Q4 a mixed bag: NII up 45%; pre-tax profit falls 22%

"Due to better-than-expected core operating performance and an improving credit cost outlook, we have revised our profit after tax (PAT) estimates by 10%/3% for FY21/FY22E," wrote analysts at Motilal Oswal Financial Services in their earnings review note. They maintain 'buy' call with a target price of Rs 700. 

Global brokerage firm CLSA, too, maintains 'buy' stance on the stock and has raised target price to Rs 610 from Rs 595.

"The bank has reported a operationally strong Q4 quarterly performance. While the asset quality has weakened, its coverage has improved. The profit was above our expectations and was driven by better operational performance. We expect a rebound in FY22," it said in its earnings review note.

The Mumbai-based bank's gross non-performing assets (NPAs) as a percentage of loan book stood at 2.45 per cent as of March 2020, an increase of 27 basis point sequentially. Write-offs of Rs 1,490 crore confined the overall gross NPA pressure in Q4. Net NPA stood at 0.91 per cent, down 30 basis points from 1.21 per cent in Q4FY19.

That apart, the provisioning for IL&FS, two fraud accounts (each from the housing finance and travel sectors) and telecom loan accounts, and the impact of Covid-19 pandemic led to provisions surging to Rs 2,440 crore, from Rs 1,043 crore in the December 2019 quarter (Q3) and Rs 1,561 crore in the year-ago period. The bank provided Rs 283 crore (including floating provisioning of Rs 260 crore) for the coronavirus impact. IndusInd’s credit cost, which is bad loan provisioning as a percentage of average loan book, shot up to 86 basis points in Q4, from 28 basis points in Q3. With this, IndusInd’s provision coverage ratio stood at 63 per cent as of March 20, up from 53 per cent as of December 2019.

Overall, the lender's pre-tax profit declined 22 per cent year-on-year (YoY) and 77 per cent quarter-on-quarter (QoQ) to Rs 302 crore.

"IndusInd Bank’s Q4FY20 earnings were characterised by abnormally higher credit cost (over 450bps), elevated slippages (~4 per cent run-rate dominated by corporate accounts) and run-down in deposits (of ~7 per cent), depressing earnings momentum equivalent to mere 0.4 per cent RoAs. Positively, core operating performance was strong, with NIMs improving 10bps (skewed towards build-up in retail), holding on its forte in MFI, provision coverage being shored up to 63% (up ~20 per cent points in the last four quarters) and Covid-19 related risks partially provided (albeit mere 11 bps)," said an analysts' note by ICICI Securities.

While the brokerage has cut its target price from Rs 1,268 to Rs 530, it maintains 'buy' call on the stock.

"We anticipate its loan growth to moderate to sub-10%, NIMs to contract by ~15bps (focus on quality) and credit cost to be still elevated at 2.4 per cent in FY21. This leads us to cut earnings by 4 per cent and prune target multiple to 1.1x. The stock has eroded its 2/3rd value in the last three months due to perceived risk in near-term earnings. Valuations at 0.8x P/ABV FY21E render risk-reward favourable," the note said.