IInndduussIInndd BBaannkk LLiimmiitteedd - … Bank - Final report - August...Initiating Coverage IndusInd Bank Ltd. Credit card 5 | P a g e s –Even though the number of credit cards

August 8, 2012

IInndduussIInndd BBaannkk LLiimmiitteedd ““CCllaassssiicc eexxaammppllee ooff wwhhaatt aa ggoooodd mmaannaaggeemmeenntt ccaann aacchhiieevvee””

Initiating Coverage IndusInd Bank Ltd.

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Recommendation BUY

Snapshot

IndusInd Bank is a classic example of what an excellent management can achieve with regard to the overall performance of the Bank.

Investment Rationale

Numbers speak for themselves: The Bank, which clocked a mediocre profit of Rs.75 crore for FY’08, is looking to touch a figure of Rs.1000 crore for FY’13E(having already posted a net profit in excess of Rs.800 crore for FY’12E).

Key growth drivers of the loan book: The key growth drivers with regard to the loan book are vehicle finance segment, credit cards, Loan Against Property (LAP). However, the focus going forward in the consumer finance book would be LAP and credit cards.

Significant improvement in CASA ratio: The Bank has significantly improved the CASA ratio on an expanding Balance Sheet from 15.7 per cent to 27.8 per cent since March 2008 till date. The strong surge in CASA has led to a significant improvement in the Net Interest Margin (NIM) (from 1.37 per cent to 3.22 per cent) during the corresponding period.

Completion of the “full circle”: The Bank has not only added the entire range of missing products to its portfolio but has efficiently scaled up the branch network from 180 to 421 ( targeting a figure of 650 by FY’14E). This, backed by strong surge in fee income growth (more than 50 per cent of which is not linked to the Balance Sheet) has helped the Bank scale new heights!

Valuation & Recommendation

We expect IndusInd Bank to post a net profit of Rs.1055 crore on Net Interest Income of Rs.2225 crore in FY’13E. We expect the Bank to clock a net profit of Rs.1335 crore on Net Interest Income of Rs.2820 crore for FY’14E. This translates into an EPS of Rs.28.5 for FY’14E. At the present price, the share is available at 2.4x FY’14E adj. book value and a P/E multiple of 11.5 earnings. Considering the strong growth backed by robust asset quality and improved operational parameters, we assign a multiple of 3 to FY’14E adj. book value (of Rs.137.5) to arrive at a price target of Rs.413 over the next 9 months.

CMP (Rs.) Rs.327

Sector Banking

Stock Details

BSE Code

Bloomberg Code

Market Cap (Rs. cr)

Free Float (%)

52- wk HI/Lo (Rs)

Avg. Volume BSE (Monthly)

Face Value (Rs)

Dividend (FY 12)

Shares o/s (Crs)

532187

IIB IN

15325

80.6

352/222

41,667

10.0

22%

46.9

Relative Performance 1Mth 6Mth 1Yr

IIB(%) (5.1) 6.8 24.2

NIFTY(%) 0.5 (0.5) 4.4

Shareholding Pattern as of 30 June 2012

Promoters Holding 19.4%

Institutional (Incl. FII) 58.1%

Corporate Bodies 13.5%

Public & others 9.1%

Vishal Jajoo – Sr. Research Analyst (+91 22 3926-8136) Email id: [email protected]

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INDUSIND BANK NSE S&P CNX NIFTY INDEX

Particulars (Rs Cr) Net interest

Income Growth (%) PAT Growth (%) P/E (x) P/ABV (x) RoE (%)

FY'10 886 93.0 349 135.3 38.5 5.9 17.2

FY'11 1,376 55.3 577 65.3 26.4 3.8 17.9

FY'12 1,704 23.8 803 39.2 19.0 3.4 18.3

FY'13E 2,225 30.6 1,055 31.4 14.5 2.8 20.4

FY'14E 2,820 26.7 1,335 26.5 11.5 2.4 21.8

(Source: Company, Nirmal Bang Research)


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INVESTMENT RATIONALE

Poised to grow exponentially under Planning Cycle - II

Following the major change at the top management level in March 2008 with Mr. Romesh Sobti taking over as the managing director & CEO (joined by some of his senior colleagues of ABN AMRO Bank), IndusInd Bank has done extremely well during its first phase of consolidation (2008-11). This was achieved despite two years of global uncertainty (CY2008 and CY2011). The improvement in performance continues in the second phase also (post-2011). The Bank has posted robust set of numbers on all parameters, as can be seen from the table below.

Exhibit 1: Improvement across all parameters since FY’08

Parameters Key ratios FY'08 FY'09 FY'10 FY'11 FY'12 Q1FY'13

Profitabiltiy

NIM 1.37% 1.81% 2.88% 3.47% 3.33% 3.22%

RoA 0.34% 0.58% 1.14% 1.46% 1.57% 1.57%

RoE 6.92% 11.69% 19.49% 19.27% 19.30% 20.35%

Efficiency Cost/Income Ratio 67.20% 59.77% 51.12% 48.25% 49.45% 49.68%

Net NPA 2.27% 1.14% 0.50% 0.28% 0.27% 0.27%

Productivity Revenue/Employee (Rs. lakhs) 21 22 27 30 30 31


The management has made major investments in terms of human resources, information technology (IT), among other things, during the first phase so as to make it ready for the next level of growth. It is to be noted that during this period of growth across all parameters, inspite of the employee strength increasing to 10,462 and the branch network scaling up from 180 to 421, the revenue growth was much stronger than the increase in cost, as evident from the cost/income ratio.

The Bank added a whole range of financial products and services, which were missing earlier, to provide an entire range of full-fledged products to its portfolio, the latest ones being Loan Against Property (LAP), Credit cards ( following purchase of the credit cards business of Deutsche Bank) and used CVs.

Before 2008, the Balance Sheet was mainly funded through term deposits considering the fact that CASA ratio stood at a dismal 15.7 per cent on a small deposit base of Rs.19000 crore and Balance Sheet size of Rs.23300 crore. That means the Bank used to borrow at the highest rates in the industry and lend at the lowest rates, resulting into much lower efficiency and very poor productivity. Consequently, the RoA and RoE of the Bank stood at 0.34 per cent and 6.9 per cent respectively in 2008.

Improvement across all parameters since

FY’08


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With the addition of all the missing products in the portfolio, the Bank not only made it a complete suite of all possible products, but also invested in human resources, IT and gradually ramped up the branch (as well as ATM network). The combined effort of all this has resulted in a sharp improvement in performance. In the Planning Cycle –II, the management has set the following targets for itself: Exhibit 2: Targets in Planning Cycle-II

Loan Book Loan book to grow 25-30% per annum; well above the system growth

Growing the Consumer Finance Book

To grow the consumer finance book beyond Rs.25000 crore at the end of year 3 (mainly funded through CASA)

CASA CASA to reach 35% plus levels by the end of year 3(from the present 28% levels)

Cost-to-Deposit Ratio In the range of 75%-80%

Fee Income To exceed loan growth; increased focus on new fee enhancers

(Source: Company, Nirmal Bang Research) A review of the above is a testimony of the fact as to what an excellent management can achieve in terms of financial performance. The Bank, which posted a mediocre profit of Rs.75 crore in FY’08, is at the threshold of touching the Rs.1000 crore PAT mark for FY’13E! Key growth drivers going forward

Considering the proven track record, we are confident that the Bank’s management would be able to meet its targets well. We have evaluated all the parameters to arrive at the fact that the Bank is well-positioned to execute the strategies, as planned. We also derive a lot of comfort from the past track record, which shows the execution capability of the top management even in the worst of the times. Since FY’08 to FY’12, a major portion of the loan book consisted of corporate segment, and, as on date, the contribution of corporate segment and retail segment continues to be more or less equal. However, going forward, we feel that a higher portion of growth-enablers would be from the retail segment which should help the Bank management achieve its growth guidance.

1. Loan book growth – The Bank has targeted various verticals, mainly in the retail

segment, which should not only lead to an increase in the loan-book size but also an improvement in NIMs. The loan-book size is targeted at Rs.55,000 crore by 2014 ( from the present figure of Rs.37245 crore), a CAGR of 25 per cent. More than 50 per cent of this loan book would be contributed by vehicle finance (42%), the recently-acquired credit cards division(1%) and Loan Against Property segments(8%).


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Credit cards – Even though the number of credit cards in the country has declined from over 27 million to 19 million, IndusInd Bank has acquired the credit card business from Deutsche Bank, which has enabled it to get access to an already established card business with a customer base of 1.6 lakh customers. The same has become operationally profitable in the first month of acquisition itself! The present size of this business is close to Rs.260 crore and is expected to achieve a size of Rs.800 crore by FY’14E. IndusInd Bank has adopted a conservative approach considering the high risk of delinquencies associated with the credit card business. The Bank, out of its total client base of more than 1.5 million customers, will figure out the ones who have a proven track record and they would only be eligible for a credit card (from within the Bank). This should reduce the scope of risks in this segment significantly. Though the size of the business may appear small considering the loan book and the Balance Sheet size, it would be important considering the high margins that this segment is expected to generate. Vehicle finance segment - Vehicle finance segment constitutes the single largest component of the loan-book with more than 48 per cent weightage. The Bank had a long legacy of being one of the oldest CV financiers in the country and the vehicle finance book came as a part of the same. However, the management has not only adequately scaled up the business but with various initiatives taken, should be able to mitigate the impact of weakening automobile sales numbers. These initiatives include recent tie-up with a number of manufacturers, thereby increasing the product portfolio, entering new segments like used-CVs, etc. This should not only diversify the business segments within the vehicle finance segment but also shift the focus more towards high-margin segment and reduce the chances of delinquencies substantially. The prevailing weak trend in case of sale of new CVs will not impact the performance of IndusInd Bank considering the fact that the robust sale of CVs over the past several years has added a significant large number of vehicles to the pool. This pool itself has become a large area which the Bank will not only address comfortably (on the basis of past experience) but also generate higher margins. The yields in case of new vehicles stand in the range of 13.5 per cent per annum while in case of used CVs, the yields are around 17 per cent per annum. This new market for the Bank will not only help expand the loan book in difficult times but also generate higher margins. In the used-CV financing business, IndusInd Bank mainly focuses on the 4-5 year old vehicle segment, thereby not entering into direct competition with leading NBFCs exclusively focused on the 7-year plus segment. The Bank has one of the strongest networks in the CV portfolio. The same is distributed through 700 dedicated outlets of the Bank (and not from the branches).


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Loan Against Property – IndusInd Bank has launched Loan Against Property (LAP) segment in which ticket size is expected to be in the range of Rs.30-50 lakhs with a tenure of around 5-7 years. The LTV (loan-to-value) ratio is expected to average around 40-50 per cent. Though the contribution of this book is much smaller(Rs.500 crore) compared to the total loan book, but, on a small base, we expect this to contribute significantly over the next few quarters to Rs.4500 crore by FY’14E. Apart from the above, various other initiatives like factoring, currency chest, among others, should also add to the portfolio of products. We believe that considering the small base at which the Bank is operating, IndusInd Bank has achieved a loan-growth of 34 per cent (almost double than the system growth) in FY’12 and 31 per cent in Q1FY’13. Considering this trend, we are confident that the Bank would be able to achieve the 25 plus per cent growth rate in FY’13E (a multiplier of 1.5x times the system growth for the corresponding period). Additionally, the Bank has taken various other initiatives which include distribution tie-up with Housing Development Finance Corporation Ltd. (HDFC), the largest mortgage financier in the country. IndusInd Bank does not have its own mortgage product. However, the Bank would be selling HDFC’s housing loan portfolio as a third-party agent and getting a commission of 0.9 per cent of the amount disbursed. We believe that initiatives of such type should help the Bank not only generate higher income with the increasing number of branches but the growth comes without any capital getting deployed. Secondly, mortgage financing is a low-margin and high-volume product requiring a specialized understanding of the real estate market coupled with various interest rate cycles to keep a tab on the delinquency levels. The present distribution model of the Bank does not require it to take the corresponding risk. Moreover, the yield on advances of the Bank for the last quarter stood at 13.9 per cent while the yield on home loan product is around 11 per cent. Therefore, the Bank would be more efficient in being a distributor of this product rather than take the home loan product in its own book, thereby not impacting the overall margins and also utilizing the capital.

2. Fee Income growth – The Bank has continuously registered a robust growth in the core-fee income. The key initiatives taken in this area include thrust on investment banking, forex services, among others.

During FY’08-12 period, the core fee income grew at a strong CAGR of 43 per cent compared to the loan book growth and Balance Sheet growth of 29 per cent and 25 per cent respectively. During Q1FY’13, the core fee income grew 43.8 per cent y-o-y. We expect this trend to continue going forward also. Distribution segment continues to be a steady performer contributing 20 per cent of the total core fee income. While forex continues to grow at a strong pace, the growth in the Investment Banking(IB) segment, albeit on a lower


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base, holds the key. A significant portion of the core fee income has no linkage with the Balance Sheet. Therefore, even if the Balance Sheet growth is marginally lower than the targeted growth, the Bank is assured of strong growth in the fee income segment since approximately half of the fee income is not linked to the Balance Sheet and continues to do well. A break-up of the fee income components have been given below in tabular form:

Exhibit 3: Performance of the fee income segment

Particulars FY'08 FY'09 FY'10 FY'11 FY'12 CAGR

Core Fee 217.9 323 434 629 913 43%

% of total fees 73% 66% 78% 88% 90% -

Total fees 297 490 553 714 1,012 36%

Loan-book 12,795 15,771 20,551 26,166 35,064 29%

Balance-Sheet size 23,319 27,615 35,430 45,691 57,597 25%

(Source: Company, NB Research)

The core fee income has registered a strong growth of 45 per cent y-o-y at Rs.913 crore in FY’12 compared to Rs.629 crore during FY’11. This was mainly on the back of strong growth in the foreign exchange segment and third party distribution segments which grew 83 and 52 per cent respectively and together contribute to almost half of the core fee income. During Q1FY’13, forex and distribution segments contributed ~45 per cent of the core fee income. IB grew 213 per cent y-o-y at Rs.31.18 crore. We expect this segment to contribute Rs.130 crore in FY’13E. The simultaneous focus on Consumer and Corporate Banking has helped the Bank to rapidly expand its customer base and grow its business volumes, and has also facilitated the cross-selling of diverse products and entry into new business segments, thus consolidating the stream of fee-based income.

Exhibit 4: Break-up of the last eight quarters of the fee income segment

Particulars (Rs. Cr) Q2FY'11 Q3FY'11 Q4FY'11 Q1FY'12 TTM

Q2FY'12 Q3FY'12 Q4FY'12 Q1FY'13 TTM Y-o-Y (%)

Trade & remittances 22.21 22.73 23.69 25.49 94.12

28.55 33.21 30.87 37.28 129.91 38.03

Foreign Exchange Income 31.65 32.65 26.56 42.27 133.13

52.30 60.13 46.04 63.38 221.85 66.64

TTP Distri. Income (Ins., MF) 39.54 40.16 44.81 50.57 175.08

57.08 66.30 70.69 56.44 250.51 43.08

General Banking Fees 21.88 18.40 23.79 25.60 89.67

26.85 27.79 29.80 29.03 113.47 26.54

Loan Processing Fes 29.35 29.64 34.67 33.17 126.83

39.13 41.60 46.79 51.72 179.24 41.32

Investment Banking 18.51 28.28 11.33 9.97 68.09

7.96 21.31 39.77 31.80 100.84 48.10

Total Core Fee Income 163.14 171.86 164.85 187.07 686.92

211.87 250.34 263.96 269.65 995.82 44.97



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3. CASA grew at a CAGR of 51 per cent over FY’08-12 period – The CASA ratio of the Bank has grown at a CAGR of 51 per cent over FY’08-12 period. The corresponding growth in the savings account during this period stood at 41 per cent. While the Balance Sheet grew at a CAGR of 25 per cent during this period, the strong growth in the CASA has led to significant improvement in CASA ratio as a percentage of deposits. The same stood at 15.7 per cent during FY’08 and increased to 27.3 per cent for FY’12. The CASA ratio inched up by 60 bps to 27.9 per cent during Q1FY’13. The Bank’s focus is to increase the CASA ratio from the present 27.9 per cent of deposits to 35 per cent by FY’14E, implying a figure of Rs.24000 crore. This translates into an average run-rate of Rs.1600 crore per quarter over the next seven quarters.

Exhibit 5: Break-up of the deposit structure of the Bank

Particulars (Rs. Cr.) FY'08 FY'09 FY'10 FY'11 FY'12 Q1FY'13

Demand 1,802 2,955 4,407 6,272 6,869 7,418

Savings 1,186 1,300 1,915 3,059 4,694 5,139

Term deposits 16,049 17,855 20,388 25,034 30,799 32,519

Total deposits 19,037 22,110 26,710 34,365 42,362 45,076

CASA (as a % of deposits) 15.7% 19.2% 23.7% 27.2% 27.3% 27.9%

Balance Sheet size 23,319 27,615 35,430 45,691 57,597 60,712

Savings deposit 6.2% 5.9% 7.2% 8.9% 11.1% 11.4%

CASA 2,988 4,255 6,322 9,331 15,721 12,557


The other initiatives taken by the Bank which differentiate the same from other banks services include:

Option to choose the denomination of their choice while withdrawing money from ATMs

Allowing customers/relatives to withdraw money without using ATM card

Providing scanned copies of issued cheques behind their account statement

The management has indicated that these are only few initiatives taken by the Bank and a number of such differentiated offerings have led to customers (even from other banks) being inclined towards IndusInd Bank’s ATM usage.

IndusInd Bank has increased the interest rates of savings account deposits which should help the Bank garner higher deposits in future, ultimately helping the same to shore up to 35 per cent from the present level of 27.9 per cent. IndusInd Bank has been amongst the handful of banks to be proactive in implementing the recommendations of the Reserve Bank of India(RBI) whether it be policy rates or


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whether it is de-regulation of the savings bank rates. The savings rate de-regulation announced by the RBI has helped the Bank increase the savings account deposit. The share of savings deposits in total deposits rose to 11.4 per cent as of June, 2012 from 8.6 per cent at the end of October, 2011. Addition of new products, branch expansion coupled with the increase in savings bank account rates should help the Bank increase the savings account deposits significantly going forward.

Professionally-run Bank

The Bank has been running exceedingly well in a professional manner under the new management team. The promoter holding in the Bank has come down significantly to 19.4 per cent (on March 31, 2012) from 28.5 per cent (on March 31, 2008).

Exhibit 6:Institutional and Promoter Holding over the last 18 quarters


Expansion in branch network

The branch network has more than doubled since the taking over of the new management. The branch network, which stood at 180 on March 31, 2008, has expanded to 421 branches on June 30, 2012. The target is to achieve a figure of 625-650 by March 2014. With the complete range of products under its portfolio and enhanced branch network, the Bank is strategically placed to not only increase the liability franchisee from the present level of 27.9 per cent but also scale up the fee-based services significantly. This network could be effectively used as a distribution platform for various products which the Bank is offering. On the liability front, the enhanced network would help scale up the savings account

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FIIs & Institutional holding Promoters

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deposits, which have marginally been behind the curve compared to the overall CASA growth. The savings account deposits have clocked a CAGR of 41 per cent over the last five years compared to the 51 per cent growth clocked by the CASA deposits during the corresponding period. The same trend has been observed in case of other private sector banks too where the branch expansion (from 200 branches to 700 branches) has led to a significant improvement in CASA. The table below highlights the same.

Exhibit 7: Expansion in CASA ratio of other private sector banks in-line with branch network expansion

Private sector Banks No. of branches CASA Ratio (%)

HDFC Bank 231 43

761 54

Axis Bank 192 23

671 46

(Source: NB Research)

This expansion in branch network should help IndusInd Bank ultimately scale up the liability franchisee portfolio with a complete range of product portfolio, better quality of services, relationship with corporates leading to higher number of salary accounts as well as offering higher interest rates. Strict control over costs

The Bank management has maintained a strict control over costs and despite the Bank being

in an investment mode in terms of technology, human resources and branch expansion, the

efficiency ratio and the productivity ratios have shown a continuous improvement.

A brief summary of efficiency ratio, productivity ratio and branch expansion have been given

below in a tabular form. The cost/income ratio has more or less remained stable despite the

fact that the Bank has opened 121 new branches over the last five quarters, taking the total

to 421 branches.

Exhibit 8: Continuous decline in the Cost/Income ratio since FY’08

Particulars FY'08 FY'09 FY'10 FY'11 FY'12 Q1FY'13

Cost/Income Ratio 67.2% 59.8% 51.1% 48.3% 49.5% 49.7%

Revenue/Employee (Rs. lakh) 21 22 27 30 30 31

Number of branches 180 180 210 300 400 421



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We don’t expect the cost/income ratio to increase substantially despite aggressive

expansion in branch network, going forward.

Significant improvement in asset quality

IndusInd Bank has registered a robust improvement in asset quality since FY’08. As evident

below, the gross and net NPAs have declined significantly reflecting the clean-status of the

loan book. The Provision Coverage Ratio(PCR) also has improved significantly over the

corresponding period.

Exhibit 9: Significant improvement in asset quality


We do agree to the fact that the Bank has been growing its loan book at a pace much higher

than the overall system. While this raises a question with regard to the asset quality going

forward, especially during the present weak economic scenario, we feel that the

management will manage to keep its asset quality strong considering the fact that the

corporate loan portfolio mainly consists of working capital loans (85 per cent) and 93 per

cent of the loans are in the investment grade category. The average duration of the

corporate loan book is just seven months.

The credit cost of the Bank was equally balanced between the consumer finance book and

the corporate loan book between FY’09-11 period. However, the share of consumer finance

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FY'08 FY'09 FY'10 FY'11 FY'12 Q1FY'13

Provision Coverage Ratio Gross NPAs Net NPAs


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book was higher compared to the corporate book in the credit cost figure for FY’12 and

Q1FY’13.

Exhibit 10: Break-up of the loan book


With reference to the other growth drivers, the credit card business, the Bank has been very

conservative and selective in distributing the cards to its own selected clients having a very

clean track record. This should mitigate the risk associated with this ‘high risk-high return

segment’ substantially. In the LAP segment, the Bank has kept the LTV ratio at around 50 per

cent levels, thereby, maintaining a substantial cushion as far as the value of the property to

the amount of loan disbursed is considered.

Well-diversified loan book

IndusInd Bank has a well-diversified loan book which is equally divided between the

corporate and retail segment. Within the corporate finance segment also, the contribution

of large corporates stand at 27 per cent, mid-sized corporates stand at 15 per cent and small

corporates at 8 per cent of the total loan book.

On the corporate front, the Bank mainly finances working capital requirement. The loan

book is one of the most diversified in the industry with exposure not exceeding four per cent

to a particular sector. The break-up of the corporate loan portfolio in terms of sectoral

exposure has been given below in a tabular form:

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Corporate Retail


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Exhibit 12: Break-up of the corporate loan book

Sector Loan book as on June 30, 2012

NBFCs 4.4

Lease Rental 2.6

Power 2.5

Construction related to infra 2.2

Gems & Jewellery 1.7

Steel 1.5

Hospitality & Medical Services 1.5

Pharma 1.3

Paper 1.3

Auto Ancillaries 1.1

Other Industries 29.7


The quality of the corporate portfolio has been given below in a tabular form with more

than 93 per cent of the portfolio falling into investment grade, thereby reassuring about the

asset quality of the Bank.

It is interesting to note (and one needs to give marks to the management’s foresight) that

the Bank does not have any exposure to the troubled aviation sector and minimal exposure

to the power sector (2.2 per cent).

Exhibit 13: Well-rated corporate loan portfolio

(Source: Company)


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With regard to the retail portion of the loan book, it is mainly dominated by the vehicle

finance portfolio.

Exhibit 14: Break-up of the retail loan book

Particulars (%)

Commercial Vehicles 24

Utility Vehicles 4

Small CVs 5

2-w 4

Car loans 4

Equipment finance 6

Vehicle finance 48

Credit Cards 1

Loan Against Property+ Others 1

Others 2

Total 50


We expect the used CV component in the commercial vehicle segment and the credit cards

portfolio and LAP to contribute at a higher pace in the retail segment, on the back of low

base.

Execution and performance management

The Bank management has focused on strong execution and performance management as

mentioned below:

The Bank management has standardized and centralized much of the processes

Continous efforts in imparting training to the staff through online training platform

Strong focus on branch becoming profitable within a period of twelve months of

opening

In the next couple of months, the Bank would be converting the existing system to

new core banking system to better engage and serve customers


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COMPANY BACKGROUND

Incorporated in the year 1994 and promoted by the Hinduja Group, IndusInd Bank is one of the new generation private sector banks in the country. Though the Bank did not post any losses on the financial front, it faced ‘tough times’ prior to 2008. The branch network was stagnant and the portfolio of the Bank lacked a number of offerings. The Bank re-invented itself under the able leadership of Mr. Romesh Sobti and his team (post-2008) and has delivered on all parameters.

RISKS & CONCERNS

Team-driven approach

The Bank’s phenomenal turnaround is attributable to the team managing the affairs of the Bank. Though the team has its own commitment towards taking the Bank to new heights, any negative developments on the human resources front can negatively impact the performance.

Significant slowdown in the automobile segment

Since a significant portion of the Bank’s revenues are derived from the automobile sector, any major slowdown in this sector can be detrimental for the Bank’s performance. New initiatives need to generate expected returns

The Bank has been growing faster than the growth in the overall system. During this process, it has also entered verticals in which it does not have the required experience as well as expertise. Any marginal deviation in the outcome from these initiatives may not be taken well by the markets. Significant increase in cost on account of branch expansion programme

Any significant increase in the cost structure on account of higher expenses incurred in expanding the branch network, if not able to generate the corresponding revenues, can impact the financial performance negatively.

VALUATION AND RECOMMENDATION

IndusInd Bank registered revenues of Rs.5359.2 crore in FY’12, registering an increase of 49.3 per cent y-o-y. The Other Income for the year stood at Rs.1011.8 crore compared to Rs.713.7 crore, an increase of 41.8 per cent y-o-y. The PAT for the year stood at Rs.802.6 crore against Rs.577.3 crore, an increase of 39 per cent y-o-y. The EPS for the year stood at Rs.17.2 and book value at Rs.97. During Q1FY’13, the Bank registered revenues of Rs.1632 crore. Other Income stood at Rs.318.8 crore, an increase of 48 per cent y-o-y. Net Interest Margin(NIM) for the quarter stood at 3.22 per cent with PAT at Rs.236.2 crore. The EPS for the quarter stood at Rs.5.05 and book value at Rs.101.7.


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We expect IndusInd Bank to post a net profit of Rs.1055 crore on Net Interest Income of Rs.2225 crore in FY’13E. We expect the Bank to clock a net profit of Rs.1335 crore on Net Interest Income of Rs.2820 crore for FY’14E. This translates into an EPS of Rs.28.5 for FY’14E. At the present price, the share is available at 2.4 FY’14E adj. book value and a P/E multiple of 11.5 earnings. On the back of savings rate de-regulation, full portfolio of offerings through enhanced branch network (nearly doubling to 625-650 by FY’14E) and higher growth in the Core Fee Income, we expect a CAGR of 28.9 per cent over the next two years.

IndusInd Bank is a classic case of a solid professional management scripting a turnaround. It was December 31, 2008 when the Bank’s market capitalization stood at Rs 1,337 crore (Sensex at 9,647 points) and Romesh Sobti, the MD & CEO of the bank, had assumed charge at the helm. This was followed by a series of management level recruits in the next two months. Today the Bank’s market cap stands at close to Rs.16,000 crore, a eleven-fold jump since 2008 and the broader index is trading above 17,000 points. Unlike the past, the private sector lender now commands respect among market participants. Considering the strong growth backed by robust asset quality and improved operational parameters, we assign a multiple of 3 to FY’14E adj. book value (of Rs.137.5) to arrive at a price target of Rs.413 over the next 9 months.

http://www.moneycontrol.com/india/stockpricequote/banks-private-sector/indusind-bank/IIB

http://www.moneycontrol.com/sensex/bse/sensex-live


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Annexure 1:Top Management

Exhibit: Brief description of the top management

Mr. Romesh Sobti (Managing Director & CEO)

Mr. Romesh Sobti is the Managing Director & CEO of the Bank. Prior to this assignment, Mr. Sobti was the Executive Vice President - Country Executive, India and Head, UAE and Sub-Continent, at ABN AMRO N.V.

Mr.Suhail Chander (Head - Corporate & Institutional Banking)

Mr. Chander is the Head - Corporate & Institutional Banking. He has 27 years of rich exposure to the banking sector, which includes 17 years in ABN AMRO Bank. His strengths relate to important functions of the Bank like SME financing, wealth management, corporate banking and corporate risk management. He held the position of Head, Consumer & Commercial Banking, Singapore & Malaysia, ABN AMRO prior to joining IndusInd Bank.

Mr. Paul Abraham (Chief Operating Officer)

Mr. Paul Abraham is the Chief Operating Officer of the Bank. A Post Graduate Degree holder in Business Management (Finance) from IIM Ahmedabad, Mr. Abraham started his career with ANZ Grindlays Bank in 1982. He joined ABN AMRO Bank in January 1993 and was associated with the Bank in various capacities, both in India and abroad. Before joining IndusInd Bank, Mr. Abraham held the position of Managing Director, ABN AMRO Central Enterprise Services (ACES), for about three years. His strength lies in establishing and managing complex businesses to deliver aggressive results by effortlessly managing the internal as well as external business environment.

Mr. K S Sridhar (Chief Risk Officer)

Mr. Sridhar is the Chief Risk Officer of the Bank. He has more than 20 years of experience in handling risk management. He brings with him tremendous insights into all aspects of risk management, spanning across all client segments. With a B. Sc (Distinction) degree from Calcutta University, Mr. Sridhar went on to complete his Masters in Financial Management from Jamnalal Bajaj Institute of Management Studies. Prior to joining ABN AMRO Bank, Mr. Sridhar worked with the State Bank of India in various capacities.

Mr. Sumanth Kathpalia (Head – Consumer Banking)

Mr. Sumanth Kathpalia is the Head - Consumer Banking at IndusInd Bank. A qualified Chartered Accountant, Mr. Kathpalia has 24 years of rich experience in banking, having worked with prestigious foreign banks like Citibank N V, Bank of America and ABN AMRO. Prior to joining IndusInd Bank, he was Head Consumer Banking at ABN AMRO Bank. He has had a vast experience in consumer banking, project management, credit cards, bancassurance, wealth management and consumer finance.

Mr. Ramesh Ganesan (Head – Transaction Banking)

Mr. Ramesh Ganesan is the Executive Vice President and Head – Transaction Banking at the Bank. Mr. Ganesan has over two decades of experience in Transaction Banking. He was the Executive Director and Head Transaction Banking at ABN AMRO Bank NV before joining IndusInd Bank.

Mr. S V Parthasarathy (Head – Consumer Finance)

Mr. Parthasartahy is the Head – Consumer Finance at IndusInd Bank. Mr. Parthasarathy has over three decades of experience in banking and finance industry. He was in charge of vehicle finance business in erstwhile Ashok Leyland Finance.

Mr. J Moses Harding (Head – Global Markets Group)

Mr. Harding is the Head – Global Markets Group at the Bank. He has close to three decades of experience in banking and specialsiation in treasury operations. He served as the Executive Director at Centurion Bank before joining IndusInd Bank in 2003.

Mr. S V Zaregaonkar (Chief Financial Officer)

Mr. Zaregaonkar is the Chief Financial Officer at the Bank. He has over three decades of experience in banking. He joined IndusInd Bank in 1995 from Dena Bank. He is a qualified Chartered Accountant, Post Graduate in commerce and a law graduate with CAIIB.

(Source: Company)


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Profitability ( Rs. Cr.) FY'10 FY'11 FY'12 FY'13E FY'14E Balance Sheet ( Rs. Cr.) FY'10 FY'11 FY'12 FY'13E FY'14E

Interest earned 2,707 3,589 5,359 6,310 7,350 Equity Capital 411 466 468 468 468

Interest expended 1,821 2,213 3,655 4,085 4,530 Reserves & Surplus 1,987 3,584 4,274 5,120 6,190

Net interest Income 886 1,376 1,704 2,225 2,820 Networth 2,398 4,050 4,742 5,588 6,658

Core Fee Income 432 629 913 1,295 1,650 Deposits 26,710 34,365 42,363 53,850 67,520

Non Interest income 553 714 1,012 1,405 1,760 Borrowings 4,934 5,525 8,682 9,090 9,450

Operating income 1,439 2,090 2,716 3,630 4,580 Total loan funds 31,644 39,890 51,045 62,940 76,970

Operating expenses 736 1,009 1,343 1,795 2,130

Staff costs 291 383 485 705 780

Other Operating expenses 445 626 858 1,090 1,350 Total l iabil ity and equity 34,042 43,940 55,787 68,528 83,628

Operating profit 703 1,081 1,373 1,835 2,450 Advances 20,551 26,166 35,064 43,890 55,050

Provisions 171 202 180 270 460 Investments 10,402 13,551 14,572 18,230 21,600

Profit before tax 532 879 1,193 1,565 1,990 Cash 2,099 2,456 2,904 3,641 4,738

Taxes 183 302 390 510 655 Balances with RBI 504 1,569 2,636 2,157 1,650

Extra-ordinary items - - - - - Fixed Assets 645 596 657 850 1,020

Net Profit 349 577 803 1,055 1,335 other assets 1,169 1,298 1,764 2,050 2,480

Less: Provisions 1,328 1,695 1,811 2,290 2,910

Quarterly June.11 Sep.11 Dec.11 Mar.12 Jun.12 34,042 43,941 55,786 68,528 83,628

Net interest income 390 419 431 464 484

Non interest income 215 239 265 292 319

Total Income 605 658 696 756 803 Spread Analysis

Operating expenses 294 325 347 377 399 Key Ratios FY'10 FY'11 FY'12 FY'13E FY'14E

Operating profit 312 333 349 379 404 Average Yield on Interest bearing assets 9.1% 9.3% 10.8% 10.3% 9.70%

Provisions 45 47 43 46 54 Average Yield on Advances 11.6% 12.10% 13.8% 12.9% 12.0%

Profit before tax 267 286 306 333 350 Average Yield on Investments 6.0% 6.10% 7.7% 7.0% 6.4%

Taxes 87 93 100 110 114 Average cost of deposits 6.4% 6.3% 8.2% 6.9% 6.0%

Net Profit 180 193 206 223 236 Average cost of funds 6.4% 6.20% 8.0% 7.2% 6.4%

Profitability Ratios FY'10 FY'11 FY'12 FY'13E FY'14E Spread 2.7% 3.1% 2.8% 3.1% 3.3%

RoE 17% 18% 18% 20% 22%

RoA 1.1% 1.5% 1.6% 1.7% 1.8% Asset quality ratios FY'10 FY'11 FY'12 FY'13E FY'14E

Gross NPA (%) 1.2% 1.0% 1.0% 1.3% 1.3%

Growth Ratios FY'10 FY'11 FY'12 FY'13E FY'14E Net NPA (%) 0.5% 0.3% 0.3% 0.4% 0.4%

NII growth 93.0% 55.3% 23.8% 30.6% 26.7%

PAT growth 135.3% 65.3% 39.2% 31.4% 26.5%

Pre-prov profit growth 90.9% 53.8% 27.0% 33.6% 33.5%

Ratios FY'10 FY'11 FY'12 FY'13E FY'14E Valuation Ratios FY'10 FY'11 FY'12 FY'13E FY'14E

P/BV 5.6 3.8 3.4 2.7 2.3 EPS 8.5 12.4 17.2 22.6 28.5

P/ABV 5.9 3.8 3.4 2.8 2.4 BVPS 58.3 86.6 97.0 119.5 142.4

P/E 38.5 26.4 19.0 14.5 11.5 Adjusted BVPS 55.8 85.2 95.0 116.7 137.5


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Note

Disclaimer

This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities Pvt Ltd). The

information, analysis, and estimates contained herein are based on Nirmal Bang Research assessment and have

been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient

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