IndusInd Bank stock on the rise as demand for commercial vehicle recovers

The bank's stock price has more than doubled in six months, standing at Rs 1,026 a share

IndusInd Bank’s stock movement over the past year is interesting. When Sumant Kathpalia took charge as MD & CEO of the private lender on March 24, 2020, the stock hit a multi-year low of Rs 235. The stock had plunged 85 per cent in just about two months after hitting a high of Rs 1,586.55. 

Be it asset quality, heavy deposit withdrawals, loan growth (which was in the slow lane even ahead of the pandemic) or overall financial position, nothing was quite working in the bank’s favour when Kathpalia took over. In about 11 months, the scenario appears to have dramatically turned around. With the stock price more than doubling in the past six months, now at Rs 1,026 a share, the lost ground has reasonably been recovered.

Analysts at Morgan Stanley note that the downside risk from the Covid-19 pandemic has reduced, making a case for revising their 12-month target price to Rs 1,225 apiece, from Rs 1,075 earlier. The brokerage has an “overweight” recommendation on the bank. What’s more, even those such as UBS, which had a negative stance on the bank since 2019 because of its asset quality issues, have turned optimistic on the stock.

What makes IndusInd Bank attractive is its vehicle financing business. With a portfolio size of Rs 61,000 crore, the bank is among market leaders. With the commercial vehicle (CV) segment at the cusp of a turnaround in demand, IndusInd Bank may be at the fore to gain from this recovery.

CVs account for 11 per cent of IndusInd Bank’s loan book; vehicle loans form 29 per cent of the loan book. The bank’s assertion that it will retain its leadership position in the segment suggests that with CV sales volumes gradually picking up, it will have a positive rub-off on IndusInd Bank’s loan growth. In fact, in the December quarter (Q3), loan growth was flat YoY and the CV segment was the worst affected, down 5 per cent YoY. Yet, as disbursements were near-about the pre-Covid level, and collection efficiency improved to 97 per cent, as against 94 per cent in September quarter, it gave analysts at Motilal Oswal Financial Services the comfort to increase their earnings estimates for FY22 by 35 per cent, while budgeting for 16 per cent loan growth on a YoY basis.

With 10 per cent growth YoY in deposits and the share of low-cost current account-savings account (CASA) deposits at 40 per cent, the trouble on liability front is behind the bank. Despite a higher rate (6.5-7 per cent) on select term deposits, compared to peers (less than 6.35 per cent), the bank’s overall cost of deposits at 5.4 per cent in Q3 fell from 6.5 per cent a year ago, largely due to an overall reduction in cost of funds.

The monitorable aspect is that of asset quality. At 2.9 per cent, the proforma non-performing assets (NPA) ratio was higher by 120 basis points (bps), compared to the reported gross NPA ratio. On a sequential basis, as the moratorium was lifted in Q3, the proforma gross NPA ratio increased 60 basis points. Proforma slippages came at 1.24 per cent of total book, led by unsecured loans, microfinance loans, vehicle loans, and corporate slippages. The bank’s total restructuring requests stood at 1.8 per cent of total loans, higher compared to peers (less than 1.5 per cent), and 0.6 per cent of loans were restructured till Q3.

The bank’s total provisions stood at around Rs 6,900 crore in Q3, including Covid-related provisions, which works out to 3.3 per cent of its total loan book. Analysts at Emkay Global Financial said even as the near-term asset quality risks persisted, it was reasonably covered, though the true picture would emerge only after the stay on asset classification was lifted by the Supreme Court.

For now, valuation at 0.8x FY22 estimated book appears undemanding in the context of positive growth outlook and adequate provisioning cushion.