BUY SUHANI ADILABADKAR RESEARCH REPORT Q1 FY17

INDUSIND BANK LTD QUARTERLY OUTLOOK & RECOMMENDATION

Yet another Blockbuster performance by IndusInd Bank, one of the leading star performers of Indian private banking sector. IndusInd has become synonymous with double digit growth. As expected, Net Profit, Net Interest Income, deposits and advances all reported double digit growth rates. Net Interest Income, difference between interest earned and expended was at Rs. 13564 mn up by 38% YOY. Net Profit too zoomed 26% YOY at Rs.6614 mn in the current June quarter. Net Interest Margin at 3.97% completed the picture with 29 basis points jump buttressing the bank’s profitability in the present volatile scenario. Asset quality is stable with Gross NPAs and Net NPAs at 0.91% and 0.38%, rising by 4 bp and 2 bp respectively QOQ. Provisions & contingencies have risen considerably, 8% QOQ and almost doubled to Rs. 2305 mn compared to corresponding period previous year. Double digit growth rate is visible in all business segments except treasury, retail segment (23%) which constitutes 51% of the total revenue followed by other banking business (31%) and corporate (18%). Low cost funding CASA declined by 30 basis points YOY in the present June quarter which is a concern area for the bank. Other income which accounts for 23% of the total income for the bank climbed 28% YOY in Q1 FY17. Growth momentum continued for core fee with yearly growth of 23%. Deposits and Advances grew parallely at 30% growth rate YOY in Q1 FY17. Unpredictable Fed moves, China & Europe slowdown and now Brexit has kept equity investors on tenterhooks. Thus with uncertainty being the new norm, Indian Private sector offers a ray of hope for value investors. IndusInd bank with CAR of 15.42% (Tier I-14.81%), credit growth rate above industry average, growing profitability and stable asset quality is poised for high growth as one of the major players in Indian banking industry. Thus we recommend BUY for the stock for medium and long term investment.

CMP

1171.60

TARGET

Rs. 1280

SECTOR

BANKING

SCRIP CODE

532187

FACE VALUE

10

MARKET Rs. 698121.30 Mn CAP 52 WEEK Rs.1211/Rs.799 HIGH/LOW SHAREHOLDING PATTERN (%) PROMOTER 16.70 PUBLIC 83.30 OTHERS TOTAL 100 In Mn Q1 FY17 Q1 FY16 CHN% NII 13564 9807 38% NIM 3.97% 3.68% 29 BP PAT 6614 5250 26% EPS 11.10 9.88 12%

FY16A

FY17E

FY18E

NII

45165.70

54511.44

62522.73

PAT

22864.50

26662.70

30385.80

EPS

38.43

44.75

50.99

PE

30.49

26.18

22.98

In Mn

INDUSIND BANK V/S S&P BSE 30

PERFORMANCE METRICS (June Quarter FY17) Profitability Analysis PROFIT AFTER TAX (Rs. In Mn)

NET INTEREST MARGIN 6614

7000 5600

3.97%

4.00%

6204

6000

4.05%

5810

3.91%

3.95%

5250

3.94%

3.88%

3.90%

5000

3.85% 3.80% 3.68%

4000

3.75%

3000

3.70% 2000

3.65% 3.60%

1000

3.55% 0 Q1 FY16

Q2 FY16

Q3 FY16

Q4 FY16

Q1 FY17

IndusInd Bank witnessed strong first quarter FY17 with PAT and NII both rising by 26% and 38% YOY respectively. Sequential growth is 7% for both PAT and NII at Rs. 6614 mn and Rs. 13564 mn compared to Rs. 6204mn and Rs. 12682 mn respectively in the previous March quarter. Though sequential growth was constant at 3 basis points over the last three quarters, Net Interest Margin (NIM) has improved by 29 basis points YOY. Other Income which contributes 23% of the total income increased 28% YOY at Rs. 9730 mn compared to Rs. 7616 mn in the corresponding quarter of the previous year whereas sequential growth is 7% in current June quarter. Core fee, major contributor of other income rose 23% YOY and stood at Rs. 7819 mn compared to Rs. 6362 mn, same period previous year. Barring foreign exchange income & investment banking, rest all components of core fee rose in double digits. Trade & Remittance reported highest growth at 95% YOY.

3.50% Q1 FY16

Q2 FY16

Q3 FY16

Q4 FY16

Q1 FY17

NET INTEREST INCOME (Rs. In mn) 16000 13564

14000

12682 11734

12000 10000

10943 9807

8000 6000 4000 2000 0 Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17

OTHER INCOME (Rs. In Mn)

CORE FEE (RS. IN MN)

Q1 FY17

Q1 FY16

CNG %

Trade & Remittance

1093.40

561.90

95%

Foreign Exchange Income

1509.70

1594.50

-5%

6000

Distribution Fees

1366.90

1069.90

28%

4000

General Banking Fees

555.30

489.40

13%

2000

Loan Processing Fees

2150.60

1416.90

52%

Investment Banking

1143.20

1229.40

-7%

12000 10000

9128 7616

8000

7835

9730

8390

0 Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17

Segment Revenue Analysis

Segment Revenue (Rs. In Mn)

Q1 FY17

Q1 FY16

REVENUE MIX

CHNG%

51%

Treasury

7947.90

7882.80

Treasury

0.83% 31%

Corporate Retail

13606.60

22814.70

11507.70

18495.60

18.24%

23.35%

Corporate 51% Retail

18% 0.002%

Other Banking Business

89.70

68.50

30.95%

Other Banking Business

All revenue segments except treasury rose in double digits on yearly basis with other banking business growing by 31%, though its contribution to total revenue is very low. Retail segment grew at 23% on yearly basis whereas quarterly rise was dismal. Corporate segment comprising 31% of the total revenue exhibited strong performance both quarterly and yearly at 11% and 18% respectively. Favorable monsoon and implementation of seventh pay commission is expected to propel retail revenues especially vehicle and home loans in the coming quarters. Corporate segment is expected to strengthen further with the ongoing daily reform process undertaken by the government.

Asset Quality Analysis ASSET QUALITY

Q1 FY17

Q1 FY16

CHN

PROVISIONS (Rs In Mn) 2500

2305 2137

2000

0.91%

Gross NPAs

0.79%

1581 1500

0.38%

Net NPAs

0.31%

1771

12 BP

7 BP

1233

1000 500

Provisions & Contingencies

2304.70

1233.30

86.87%

0 Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY16

Asset quality for the bank has deteriorated mildly with Gross NPAs and Net NPAs rising consistently every quarter. Gross and Net NPAs rose by 4 and 2 basis points sequentially in the current June quarter and stood at 0.91% and 0.38% respectively. Increase in absolute terms for Gross and Net NPAs on yearly basis was 51% and 58%, whereas sequential absolute growth was 11% and 10% respectively in Q1 FY17. Provisions & Contingencies exhibited restrained growth of 8% QOQ compared to 20% sequential growth in the previous March quarter. In absolute terms, provisions almost doubled from Rs. 1233 mn in Q1 FY16 to Rs. 2305 mn in the current quarter. Provisions in the June quarter includes additional standard asset provisioning of Rs. 350 mn on account of Food Corporation of India as per regulatory requirement. Restructured advances stood at 0.49% in Q1 FY17 compared to 0.63% in the corresponding period previous year. Provision coverage ratio stands at 59% in the current June quarter compared to 61% in Q1 FY16. Gross NPAs as a % of Gross Advances 0.95

0.91

0.9

0.87

0.85 0.8

0.82 0.79

0.77

0.75 0.7 Q1 FY16

Q2 FY16

Q3 FY16

Q4 FY16

Q1 FY17

Business Growth Analysis CASA RATIO

After asset quality the next concern area is low cost funding or CASA ratio which has dipped 80 basis points QOQ and 30 basis points on yearly basis. Though the proportion of savings accounts as a percentage of total deposits has improved from 18.10% in Q1 FY16 to 18.80% in the current June quarter, Current accounts have declined from 16.60% to 15.70% over the same corresponding period. Savings accounts exhibited strong growth both quarterly and yearly at 11% and 36% on absolute basis in Q1 FY17. Current accounts, on the other hand grew at a dismal 3% quarterly and 23% YOY, leading to lower CASA ratio for the current quarter. In the long run, strong branch network of around 1004 and product innovation such as biometric, fingerprint mobile banking is expected to propel higher CASA ratio to about 40% in the next three years as targeted by the bank.

35.40% 35.20%

35.20%

35.00%

35.00% 34.80%

34.70% 34.70%

34.60%

34.40%

34.40% 34.20% 34.00% Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17

Advances & Deposits 1200000

1017680

1000000 776930

808400

864230

800000 600000

782940

821670

930000 884190

936780 Advances

722430

Deposits

400000 200000

0 Q1 FY16

Q2 FY16

Q3 FY16

Q4 FY16

Q1 FY17

Deposits grew at a higher sequential growth rate of 9% compared to Advances which rose at 6% in the present June quarter. Deposits and Advances grew almost parallely at 31% and 30% respectively YOY in the current June quarter. Deposits have been exhibiting strong growth over the last three quarters and stood at Rs. 1017680 mn in Q1 FY17. Corporate Loan book (Rs. 550870 mn) which comprises 59% of the total loan book reported increased exposure in gems & jewelry segment from 2.23% (Q1 FY16) to 5.93% (Q1 FY17), though it has slightly come down over the last quarter. Consumer finance comprising 41% of the total loan book stood at Rs. 385910 mn with commercial vehicles accounting for the major chunk, 15% of the total loan book.

Corporate Loan Book Gems & Jewellery Lease Rental Real estate NBFCs Telecom- Cellular Constn related to infra – EPC Rubber & Rubber Products Housing Finance Companies Power Generation Contract Construction- civil Media, Entertainment & Adv Services Steel Food Credit Other Industry Food Beverages & Food Processing Power Transmission

Q1 FY17

Q1 FY16

Change%

5.93%

2.23%

3.70%

4.64%

5.09%

-0.45%

2.73%

1.78%

0.95%

1.63%

1.92%

-0.29%

3.13%

1.94%

1.19%

1.55%

1.15%

0.40%

Nil

1.47%

-

1.79%

1.70%

0.09%

1.45%

1.90%

-0.45%

1.18%

1.29%

-0.11%

1.60%

1.76%

-0.16%

NIL

2.31%

-

1.58%

1.26%

0.32%

Nil

1.21%

-

29.44%

31.44%

-2.00%

NIL

1.08%

-

2.16%

NIL

-

Corporate Profile IndusInd Bank, which commenced operations in 1994, caters to the needs of both consumer and corporate customers. Its technology platform supports multi-channel delivery capabilities. As on June 31st, 2016, IndusInd Bank has 1004 branches, and 1885 ATMs spread across 625 geographical locations of the country. The Bank also has representative offices in London, Dubai and Abu Dhabi. The Bank believes in driving its business through technology. It enjoys clearing bank status for both major stock exchanges - BSE and NSE and major commodity exchanges in the country, including MCX, NCDEX, and NMCE. IndusInd Bank on April 1 st , 2013 was included in the NIFTY 50 benchmark index. On June 28, 2016, Indusind Bank has commenced operations in International Finance Service Centre (IFSC) Banking Unit in Gujarat International Finance Tec City (GIFT).

Financial Analysis QUARTERLY PROFIT & LOSS STATEMENT OF INDUSIND BANK FROM 31st DEC 2015 TO 30th SEP 2016E VALUE RS. IN MILLION

31-Dec-15 3 months

31-Mar-16 3 months

30-Jun-16 3 months

30-Sep-16E 3 months

INTEREST EARNED

29277.00

31316.90

32916.90

34496.91

OTHER INCOME

8390.00

9128.00

9729.70

10167.54

TOTAL INCOME

37667.00

40444.90

42646.60

44664.45

INTEREST EXPENDED

-17542.80

-18634.80

-19352.70

-20030.04

PROFIT BEFORE OP EXP & PROVISIONS

20124.20

21810.10

23293.90

24634.40

OPERATING EXPENSES

-9514.40

-10298.20

-10956.00

-11558.58

OPERATING PROFIT

10609.80

11511.90

12337.90

13075.82

PROVISIONS

-1770.80

-2136.60

-2304.70

-2569.74

PROFIT BEFORE TAX

8839.00

9375.30

10033.20

10506.08

TAX

-3028.80

-3171.80

-3419.40

-3556.18

PROFIT AFTER TAX

5810.20

6203.50

6613.80

6949.91

EQUITY CAPITAL

5936.40

5949.90

5958.70

5958.70

10

10

10.00

10.00

9.79

10.43

11.10

11.66

FACE VALUE EPS

ANNUAL PROFIT & LOSS STATEMENT OF INDUSIND BANK FROM 31st MARCH 2015 TO 31ST MARCH 2018E VALUE RS. In Million

31- Mar-15 12 months

31- Mar-16 12 months

31- Mar-17E 12 months

31-Mar-18E 12 months

INTEREST EARNED

96919.70

115806.60

134335.66

151127.61

OTHER INCOME

25480.00

32969.50

40882.18

46196.86

TOTAL INCOME

122399.70

148776.10

175217.84

197324.48

INTEREST EXPENDED

-62716.90

-70640.90

-79824.22

-88604.88

PROFIT BEFORE OP EXP & PROVISIONS

59682.80

78135.20

95393.62

108719.60

OPERATING EXPENSES

-28700.60

-36721.00

-45901.25

-52327.43

OPERATING PROFIT

30982.20

41414.20

49492.37

56392.17

PROVISIONS

-3890.50

-6721.60

-8872.51

-10513.93

PROFIT BEFORE TAX

27091.70

34692.60

40619.86

45878.24

TAX

-9154.50

-11828.10

-13957.16

-15492.45

PROFIT AFTER TAX

17937.20

22864.50

26662.70

30385.80

EQUITY CAPITAL

5294.50

5949.90

5958.70

5958.70

RESERVES

97240.80

167202.20

193864.90

224250.70

FACE VALUE

10.00

10.00

10.00

10.00

EPS

33.88

38.43

44.75

50.99

BALANCE SHEET OF INDUSIND BANK FROM 2015 TO 2018E CAPITAL & LIABILITIES (Rs. In Mn)

2015

2016

2017E

2018E

5294.50

5949.86

5958.70

5958.70

139.04

140.43

CAPITAL EMPLOYEE STOCKOPTIONS OUTSTANDING RESERVES & SURPLUS DEPOSITS

140.53

137.66

101010.31 741343.64

170872.23 930003.46

193864.90 224250.70 1158784.31 1413716.86

BORROWINGS

206180.56

221558.65

243714.51

263211.67

OTHER LIABILITIES & PROVISIONS TOTAL LIABILITIES

63904.17

72048.07

82855.27

91140.80

1117873.72 1400569.93

ASSETS (Rs. In Mn) CASH & BALANCES WITH RBI BALANCES WITH BANKS AND MONEY AT CALL AND SHORT NOTICE INVESTMENTS ADVANCES FIXED ASSETS OTHER ASSETS TOTAL ASSETS

1685316.74 1998419.17

40351.43

45210.41

49279.34

54207.28

67439.99

55908.31

51994.73

53034.62

228783.38

312143.15

374571.78

430757.54

687881.99

884193.42

1097528.74 1338906.46

11575.77 81841.16

12553.24 90561.41

1117873.72 1400569.93

Ratio Analysis Year

FY 15A

FY 16A

FY 17E

FY18E

EPS

33.88

38.43

44.75

50.99

NPM

14.65%

15.37%

15.22%

15.40%

BOOK VALUE

193.66

291.02

335.35

386.34

ROE

17.49%

13.20%

13.34%

13.20%

P/BV

6.05

4.03

3.49

3.03

PE

34.58

30.49

26.18

22.98

13683.03 98259.13

15393.41 106119.86

1685316.74 1998419.17

Comparative Analysis (Standalone) Q1 FY17

EPS

CAR

PAT (Rs. In Mn)

GNPA RATIO

MKT CAP (Rs. In Mn)

INDUSIND BANK

11.10

15.42%

Rs. 6614

0.91%

Rs. 701418.10

HDFC BANK

12.80

15.50%

Rs. 32389

1.04%

Rs. 3150217 .10

YES BANK

17.39

15.10%

Rs. 7318

0.79%

Rs. 520115.70

KOTAK MAHINDRA BANK

4.04

16.34%

Rs. 7419

2.50%

Rs. 1387561.90

Industry- Current Scenario Indian Banking Sector has been the bedrock of resilience against global volatility. With fiscal deficit & CAD in control, stable exchange rate and moderate inflation, India is poised for high sustainable growth. Indian banking system on its part has gone though various highs and lows over the last 10-12 years. Third & fourth quarters of FY16 for Indian banks especially PSU were marred by high provisions and losses due to cleaning up process directed by Reserve Bank Of India. PSU banks might be under stress for the next 2 -3 quarters whereas Private sector banks with low exposure to power & infrastructure sectors have fared well during financial crises since 2008. Though they have performed well during tough times buttressing banking services in urban and semi urban India, they have not remained unscathed by slowing Indian economy as witnessed by rising non performing assets. Over the last one and a half years, domestic scenario has changed with more autonomy given to banks through Indradanush initiative undertaken by the government. In addition to that proactive policies have been undertaken by the central bank such as introduction of MCLR, addressing liquidity needs of the banking sector, tighter norms for willful defaulters and licenses given to small & payment banks. New MCLR base rate methodology adopted since 1st April 2016 is expected to lower lending rates buttressing the loan book of the banks leading to improved bottom-line and lower provisions. With the economy gaining momentum as exhibited by the latest IIP numbers, banking system needs to become agile to fulfill the requirements of both corporate and households.

On the global front, US Fed tantrums, European sluggish economy, China’s decelerating growth have given enough challenges for our banking industry. But even in this uncertain volatile world economy, both public and private sector banks have worked together to strengthen our financial system and made India the only Brick left in the famed BRICS ellipsis.

OUTLOOK FOR THE BANK  IndusInd Bank’s, Net Interest Margin representing operational efficiency is one of the best among mid sized private sector banks. After strong quarterly jump of 20 bp in Q2 FY16, NIM has improved sequentially by a constant 3 basis points over the last three quarters. In the current Q1 FY17, the bank reported yearly jump of 29 basis points. Over the last five quarters, the bank’s NIM has been above 3.60%.  High growth in Net Interest Income, above 35% yearly growth over the last three quarters exhibits higher operational efficiency and profitability.  Credit growth is above industry average even in the present tough and volatile economic environment. The quarterly growth of Advances has been above 5% over the last 4 quarters.  Growth in Deposits picked up from Q3 FY16 and sequential growth over the last three quarters has been around 7% and above. Strong growth in both advances and deposits exhibits long term profitability and sustainability for the bank.  CASA stood at 34.40% in the current June quarter, one of the best CASA ratios among mid sized private sector banks.  Corporate and Consumer Finance loan book has grown by 30% and 29% respectively YOY. Commercial vehicles which constitute 15% of the loan book rose by 21% YOY in the current June quarter. The bank also has low exposure to stressed sectors such as power and infrastructure.  Though Gross and Net ratios look manageable, asset quality seems to be under stress with provisions rising significantly from second quarter FY16. This shows asset quality stress in the economy which the banks need to take head on to clean their balance

sheets. Indusind bank with its aggressive expansion approach coupled with high financial discipline will continue with its double digit growth in the coming quarters.  Key drivers for the bank, double digit loan growth at 30%, high NIM at 3.97% and low non performing assets makes it one of the most promising midcap private sector banks. It is a dark horse to ride on which gives both stability and profitability in the long run. Thus our recommendation remains positive for medium and long term with a target price of Rs. 1280.

SUHANI ADILABADKAR [email protected] 9701063320

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