BUY SUHANI ADILABADKAR RESEARCH REPORT

Q1 FY18

INDUSIND BANK LTD QUARTERLY OUTLOOK & RECOMMENDATION

INDUSIND BANK synonymous with double digit growth reported expected growth numbers for the first quarter FY18. Net Interest Income grew at previous quarter growth rate of 31% YOY and 6% sequentially. Net Interest Income, difference between interest earned and expended was at Rs. 17740 Mn in Q1 FY18 against Rs. 13560 Mn same period previous year. PAT growth was at 26% YOY and 11% sequentially in the current June quarter FY18. Net Profit stood at Rs. 8366 Mn in the current quarter compared to Rs. 6614 Mn corresponding quarter previous year. Net Interest Margin (NIM) was maintained at 4% similar to the previous four quarters and jumped 3 basis points YOY. Gross NPAs and Net NPAs stood at 1.09% and 0.44% in Q1 FY18 compared to 0.91% & 0.38% same period previous year with quarterly jump of 18 & 6 basis points respectively. One basis point is equal to 0.01%. Provisions & contingencies have improved sequentially by 28% whereas yearly jump has been 34%. Provisions & Contingencies were reported at Rs. 3100 Mn against Rs. 2305 Mn same period previous year. Double digit growth rate is visible in all segments with Other banking business leading with 65% growth. Corporate outplayed Retail yet again growing at 27% against 21% YOY for the retail segment with treasury following at 18% in the June quarter. Low cost funding or CASA ratio continued its galloping growth zooming 340 basis points in the current June quarter. CASA ratio was reported at 37.80% against 34.40% same period previous year supported by savings accounts rising 65% & Current account by 19% on yearly basis. In absolute terms CASA rose 44% YOY at Rs. 505010 Mn. Other income which accounts 22% of total income for the bank climbed 20% YOY in Q1 FY18 and stood at Rs. 11673 Mn falling 4% QOQ. Core fee moved with its usual momentum of 25% yearly growth at Rs. 9740 Mn. Deposits grew at a higher rate of 31% compared to Advances rising at 24% YOY. June quarter reported higher sequential growth for Deposits at 5.6% against 3% for advances in Q1 FY18. With declining provisions, credit growth above industry average, stable CASA & core fee, IndusInd aims to double itself in the next three years with respect to Clients, Loan book and profitability. With this growth ambition, the bank offers a long term opportunity for value investors with CAR of 16.18% (Tier I-15.66%). Thus we recommend BUY for the stock for medium and long term investment.

CMP

Rs. 1627.10

TARGET

Rs. 1820.00

SECTOR

BANKING

SCRIP 532187 CODE FACE 10.00 VALUE MARKET Rs. 973852 Mn CAP 52 WEEK Rs. 1635.00/1037.85 HIGH/LOW SHAREHOLDING PATTERN (%) PROMOTER 16.78 PUBLIC 83.22 OTHERS TOTAL 100.00 In Mn Q1 FY18 Q1 FY17 CHN% NII

17740.00

13560.00

31%

NIM

4.00%

3.97%

3 BP

PAT

8365.50

6613.80

26%

EPS

13.98

11.10

26%

FY17A

FY18E

FY19E

NII

60626.00

74829.77

89806.08

PAT

28678.90

35096.13

42199.99

EPS

47.95

58.64

70.51

PE

33.94

27.75

23.08

In Mn

INDUSIND BANK V/S S&P BSE SENSEX

PERFORMANCE METRICS (June Quarter FY18) Profitability Analysis PROFIT AFTER TAX (Rs. In Mn)

NET INTEREST MARGIN 4.01%

9000

8365

8000 7000

7043

7506

4.00%

4.00%

7516

6614

4.00%

4.00%

4.00%

3.99%

6000 5000

3.98%

3.97%

4000 3.97%

3000 2000

3.96%

1000

0 Q1 FY17

Q2 FY17

Q3 FY17

Q4 FY17

Q1 FY18

IndusInd Bank reported strong first quarter FY18 with PAT and NII doing business as usual, rising by 26% and 31% YOY respectively. Sequential growth was well maintained for NII at 6% whereas PAT regained its momentum rising 11% QOQ after reporting flat numbers in previous March quarter. Higher provisions which impacted previous quarter’s profitability declined 28% QOQ leading to strong bottom-line for the quarter. Net Interest Margin at 4% has been constant over previous 4 quarter and has jumped 3 basis points YOY. Other Income contributing 22% of the total income increased 20% YOY at Rs. 11673 Mn compared to Rs. 9730 Mn in the corresponding quarter previous year. Sequentially, it declined 4% compared to previous March quarter. Core fee, major contributor of other income rose 25% YOY and stood at Rs. 9740 Mn compared to Rs. 7820 Mn, same period previous year with QOQ fall of 2% in the current June quarter. Except Loan processing fees, all components of core fee rose in double digits. Investment Banking reported highest growth rate of 54% YOY in the current Q1 FY18. Cost to income ratio stands at 45.99% in the current quarter compared to 47.03% in Q1 FY17.

3.95% Q1 FY17

Q2 FY17

Q3 FY17

Q4 FY17

Q1 FY18

NET INTEREST INCOME (Rs. In Mn) 17740 18000 15784

16000 14000

16675

14600 13564

12000 10000 8000

6000 4000 2000 0 Q1 FY17

Q2 FY17

Q3 FY17

Q4 FY17

Q1 FY18

OTHER INCOME (Rs. In Mn)

CORE FEE (RS. IN MN)

Q1 FY18

Q1 FY17

CHG

Trade & Remittance

1310

1090

Foreign Exchange Income

1980

1510

31%

Distribution Fees

2100

1370

53%

General Banking Fees

640

560

14%

Loan Processing Fees

1960

2150

(9%)

Investment Banking

1750

1140

54%

14000 12113

12000

11673

20%

10168 9730

10000

9704

8000 6000 4000 2000 0 Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18

Segment Revenue Analysis

Segment Revenue (Rs. In Mn)

Q1 FY18

Q1 FY17

CHG%

Treasury

10551.40

8937.00

18.06%

Corporate

17231.10

13606.60

26.64%

Retail

27602.40

22814.70

20.99%

148.20

89.70

65.22%

Other Banking Business

REVENUE COMPOSITION

Corporate 31%

Treasury 19%

49%

Retail 50% Other Banking Business 0.0002%

All revenue segments reported positive growth YOY with other banking business reporting the highest growth rate of 65%. Corporate segment was the star performer yet again outpacing retail with yearly growth of 27% contributing 31% to total revenues. Corporate segment was constant quarterly whereas Retail grew 8% QOQ. On yearly basis, retail grew 21% at Rs. 27602 Mn contributing almost 50% of total revenues. Treasury segment jumped 18% yearly and 7% QOQ in the current June quarter FY18. Treasury revenues stood at Rs. 10551 Mn against Rs. 8937 Mn same period previous year.

Asset Quality Analysis

ASSET QUALITY

Q1 FY18

Q1 FY17

PROVISIONS (Rs In Mn)

CHN 5000 4500

4301

4000 Gross NPAs

1.09%

0.91%

18 bp

3500

3100

3000 2500 Net NPAs

0.44%

0.38%

6 bp

2305

2139

2169

Q2 FY17

Q3 FY17

2000 1500 1000

Provisions & Contingencies

3099.70

2304.70

34.49%

500 0

Q1 FY17

Q4 FY17

Q1 FY18

Gross NPAs jumped 18 basis points YOY and 16 basis points sequentially in the current June quarter. Net NPAs on the other hand moved YOY and quarterly higher by 6 & 5 basis points respectively. Provisions have increased 34% YOY but declined sequentially by 28% in the current quarter. Coming to GNPAs, two wheelers constitute the biggest chunk, 3.55% of GNPAs in consumer finance segment and deteriorated by 3 basis points QOQ followed by Utility at 1.42%. Credit Cards another important segment of Consumer Finance reported 1.21% of Gross NPAs against 1.34% in the previous March quarter improving by 13 basis points. Consumer Finance Segment constitutes 40% of the total loan book and accounted for 1.25% of the total GNPAs, deteriorating by 13 basis points QOQ. Total Gross NPAs stood at Rs. 12716.80 Mn against Rs. 8606.40 Mn same period previous year. NNPAs were reported at Rs. 5082.60 Mn against Rs 3555 Mn corresponding quarter previous year. Increase in absolute terms for both Gross and Net NPAs on yearly basis was 48% & 43%, whereas sequential absolute growth was 21% & 16% respectively for both in Q1 FY18. Provisions & Contingencies declined to Rs. 3100 Mn from Rs. 4301 Mn in Q1 FY18 sequentially with an absolute increase of Rs. 795 Mn YOY in the current June quarter. Absolute sequential decline was about Rs. 1200 Mn in Q1 FY18. Restructured advances stood at 0.17% in Q1 FY18 compared to 0.37% in the previous March quarter. Provision coverage ratio was at 60% in the current June quarter against 58% in Q4 FY17. The company has made a floating provision of Rs. 300 Mn in the quarter. ARC book for the bank was flat at Rs. 3560 Mn. The bank sold about Rs. 570 Mn to the ARC, but also recovered almost an equal amount, making the net book on ARC flat.

NON PERFORMING ASSETS 1.09

1.2 1

0.91

0.94

0.90

0.93

0.8 GNPAs

0.6 0.4

0.39

0.37

0.38

0.44

0.39

NNPAs

0.2 0 Q1 FY17

Q2 FY17

Q3 FY17

Q4 FY17

Q1 FY18

Business Growth Analysis Low cost funding or CASA ratio galloped 340 basis points YOY and stood at 37.80% in the current June quarter. In current quarter, savings accounts contributed 62% to CASA deposits and grew at 65% YOY at Rs.315560 Mn against Rs. 190910 Mn same period previous year. Sequentially savings accounts grew at 17% QOQ. Current Accounts stood at Rs. 189450 Mn in the current quarter compared to Rs. 159520 Mn same period previous year, rising 19% YOY and declining 3% quarterly. CASA on the whole in absolute terms jumped 44% YOY from Rs. 350430 Mn to Rs. 505010 Mn in the current June quarter. The bank has been building on CASA focusing on government business, capital market flows, key non-resident markets, self employed & emerging corporate businesses and transaction banking & CMS mandates. IndusInd bank has added 10 new branches this quarter taking the total number of branches to 1210 and 2090 ATMs as on June 30th, 2017 as against 1004 Branches and 1,885 ATMs same period previous year. The CRAR ratio for the quarter stood at 16.18% with Tier I capital of 15.66% as on 30th June 2017.

CASA RATIO 39.00% 37.80%

38.00% 37.10% 37.00%

36.85%

36.00% 36.50% 35.00%

34.00% 34.40% 33.00%

32.00% Q1 FY17

Q2 FY17

Q3 FY17

Q4 FY17

Q1 FY18

ADVANCES & DEPOSITS (Rs. In Mn) 1400000 1200000

1017680

1000000 936780

1123133 1027700 989491

1336730

1265720

1192180

1130810

1164070

Advances

800000

Deposits

600000 400000 200000 0 Q1 FY17

Q2 FY17

Q3 FY17

Q4 FY17

Q1 FY18

Deposits grew at a higher sequential growth rate of 6% compared to Advances which rose at just 3% in the present June quarter. Deposits out- paced advances also on yearly terms in the current quarter moving at 31% YOY whereas Advances grew at 24% YOY. Deposits have been exhibiting strong growth over the previous three quarters and stood at Rs. 1336730 Mn in Q1 FY18. Corporate Loan book stood at Rs. 693120 Mn which comprised 60% of the total loan book and has the highest exposure in gems & jewelry segment at 5.66%in current June quarter. Corporate Loan Book increased 26% YOY and 4% sequentially. Retail or Consumer finance comprised 40% of the total loan book at Rs. 470950 Mn with commercial vehicles accounting for the major chunk, 13% of the total loan book. Commercial Vehicles reported 12% YOY growth whereas QOQ growth was constant in the current quarter. Consumer Finance grew 22% YOY & 3% sequentially. CORPORATE LOAN BOOK

Q1 FY18

Q4 FY17

Change%

Gems & Jewellery

5.66%

6.14%

-0.48

Lease Rental

3.62%

5.08%

-1.46

Real estate

2.17%

2.02%

0.15

Microfinance

2.23%

2.52%

-0.29

Telecom- Cellular

2.07%

3.49%

-1.42

Constn related to infra – EPC

1.47%

1.68%

-0.21

Housing Finance Companies

0.00%

1.32%

-1.32

Power Generation

2.56%

-

2.56

Contract Construction- civil

0.93%

1.00%

-0.07

Media, Entertainment & Adv

1.13%

1.17%

-0.04

Services

1.94%

2.26%

-0.32

Steel

1.46%

1.84%

-0.38

Other Industry

31.93%

28.67%

3.26

Food Beverages & Food Processing

1.44%

1.53%

-0.09

-

1.03%

-1.03

Airlines

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 30th, 2017, IndusInd Bank has 1210 branches, and 2090 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 LTD FROM 31st Dec 2016 TO 30th Sep 2017E VALUE

31-Dec-16

31-Mar-17

30-June-17

30-Sep-17

Rs. In Million

3 months

3 months

3 months

3 months

INTEREST EARNED

36993.30

38300.10

41355.10

43216.08

OTHER INCOME

10168.00

12113.00

11672.60

12256.23

TOTAL INCOME

47161.30

50413.10

53027.70

55472.31

INTEREST EXPENDED

-21209.10

-21625.60

-23614.50

-24322.94

PROFIT BEFORE OP EXP & PROVISIONS

25952.20

28787.50

29413.20

31149.37

OPERATING EXPENSES

-12318.80

-13065.20

-13527.90

-14069.02

OPERATING PROFIT

13633.40

15722.30

15885.30

17080.36

PROVISIONS

-2168.50

-4301.30

-3099.70

-3471.66

PROFIT BEFORE TAX

11464.90

11421.00

12785.60

13608.69

TAX

-3958.50

-3904.90

-4420.10

-4641.11

PROFIT AFTER TAX

7506.40

7516.10

8365.50

8967.59

EQUITY CAPITAL

5974.20

5981.50

5985.20

5985.20

FACE VALUE

10.00

10.00

10.00

10.00

EPS

12.56

12.57

13.98

14.98

ANNUAL PROFIT & LOSS STATEMENT OF INDUSIND BANK LTD FROM 2016 TO 2019E VALUE

31- Mar-16

31- Mar-17

31- Mar-18E

31-Mar-19E

Rs. In Million

12 months

12 months

12 months

12 months

INTEREST EARNED

118717.40

142903.30

168625.89

193919.78

OTHER INCOME

32969.50

41714.90

52143.63

62572.35

TOTAL INCOME

151686.90

184618.20

220769.52

256492.13

INTEREST EXPENDED

-73551.70

-82277.30

-93796.12

-104113.70

PROFIT BEFORE OP EXP & PROVISIONS

78135.20

102340.90

126973.40

152378.43

OPERATING EXPENSES

-36721.00

-47830.80

-59788.50

-71746.20

OPERATING PROFIT

41414.20

54510.10

67184.90

80632.23

PROVISIONS

-6721.60

-10913.30

-14187.29

-17308.49

PROFIT BEFORE TAX

34692.60

43596.80

52997.61

63323.74

TAX

-11828.10

-14917.90

-17901.48

-21123.75

PROFIT AFTER TAX

22864.50

28678.90

35096.13

42199.99

EQUITY CAPITAL

5949.90

5981.50

5985.20

5985.20

167202.20

196733.80

231829.93

274029.92

FACE VALUE

10.00

10.00

10.00

10.00

EPS

38.43

47.95

58.64

70.51

RESERVES

BALANCE SHEET FROM 2016 TO 2019E CAPITAL & LIABILITIES (Rs. In Mn)

2016

2017

2018E

2019E

CAPITAL

5949.86

5981.50

5985.20

5985.20

EMPLOYEE STOCKOPTIONS OUTSTANDING

137.66

152.00

164.16

174.01

RESERVES & SURPLUS

170872.23

200327.70

231829.93

274029.92

DEPOSITS

930003.46

1265722.20

1670753.30

2102460.74

BORROWINGS

221558.65

224536.90

229027.64

233608.19

OTHER LIABILITIES & PROVISIONS

72048.07

89763.80

107716.56

124951.21

1400569.93

1786484.10

2245476.79

2741209.27

CASH & BALANCES WITH RBI

45210.41

77487.50

104608.13

135990.56

BALANCES WITH BANKS AND MONEY AT CALL AND SHORT NOTICE

55908.31

108795.00

154488.90

200835.57

INVESTMENTS

312143.15

367021.40

447766.11

523886.35

ADVANCES

884193.42

1130805.10

1432076.79

1769558.92

FIXED ASSETS

12553.24

13352.30

13953.15

14650.81

OTHER ASSETS

90561.41

89022.80

92583.71

96287.06

TOTAL ASSETS

1400569.93

1786484.10

2245476.79

2741209.27

TOTAL LIABILITIES ASSETS (Rs. In Mn)

Ratio Analysis YEAR

FY 16A

FY 17A

FY 18E

FY19E

38.43

47.95

58.64

70.51

NPM

15.07%

15.53%

15.90%

16.45%

EBDITA MARGIN

65.8%

71.6%

75.3%

78.6%

ROE

13.20%

14.15%

14.76%

15.07%

BOOK VALUE

291.02

338.90

397.34

467.85

P/BV

5.59

4.80

4.09

3.48

PE

42.34

33.94

27.75

23.08

EPS

Comparative Analysis (Standalone) Q1 FY18

EPS

CAR

PAT (Rs. In Mn)

GNPA RATIO

MKT CAP (Rs. In Mn)

NIM

CASA RATIO

INDUSIND BANK

13.98

16.18%

8365.50

1.09%

973851.89

4.00%

36.85%

YES BANK

21.12

17.10%

9655.20

0.97%

830516.80

3.70%

36.80%

HDFC BANK

15.20

15.60%

38938.40

1.24%

4591351.10

4.40%

44%

AXIS BANK

5.45

16.36

13056.00

5.03%

1237186.90

3.63%

49%

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 through 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 3 -4 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 GDP 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.

SUHANI ADILABADKAR [email protected] 9701063320

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