BULL’s EYE – INDUSIND BANK LIMITED

The present price is Rs.198. The returns from the present price is 26% Incorporated in the year 1994, IndusInd Bank is amongst the leading private sector banks in the country. The Bank has a network of 210 branches and 497 ATMs spread over 168 cities across the country. The Bank also has representative offices in Dubai and London.

Dramatic improvement seen over the last two years:

The new management, under the able leadership of Mr. Romesh Sobti ( CEO & MD), from ABN Amro Bank took the charge in early 2008. At the time of entry, the management team had set certain benchmarks for itself to be achieved over a three year time horizon. The management team identified the product and service offerings missing in the Bank’s portfolio and bridged the gap by offering the missing products and services. As a result, the operating ratios of the Bank have seen a phenomenal improvement over the last two years. Net Interest Margin of the Bank has improved from 1.37% in FY’08 to 2.88% in FY’10. The Cost-to-Income ratio has declined from 67.21% in FY’08 to 51.12%. Net NPAs have reduced from 2.27% to 0.50% in FY’10. To sum it up, during this period, the net profit of IndusInd Bank has increased from Rs.75.05 crore in FY’08 to Rs.350.31 crore in FY’10.

On a strong growth trajectory:

The Bank Management has targeted to scale up the branch network to 310 at the end of FY’11 and 700 at the end of three years from the present figure of 210. The management has set aside a sum of Rs.40 crore in FY’11 for ‘branding exercise’. The Bank is likely to take a new name – Partners Bank. These two initiatives are expected to scale up the CASA of the Bank from the present levels of 23.7% to around 30% in FY’11E.

Cost/Income Ratio to remain under check:

The Bank has recruited 2650 employees over the last two years and plans to hire another 1000 employees in FY’11. A significant portion of these employees would be having variable pay structure. As a result, inspite of the aggressive expansion plans, the management expects to reduce the Cost/Income Ratio by 200 basis points over the next one year (from the present levels of 51.12%).

Financials & Valuations:

In In FY’10, the Bank registered interest income of Rs.2706.99 crore, an increase of 17.2% on a y-o-y basis. Other Income registered an increase of 21.3% y-o-y to Rs.553.48 crore. The Bank registered a net profit of Rs.350.31 crore, y-o-y increase of 136.2%. EPS for 2009-10 was Rs.9.01 (2008-09 Rs.4.28). The Adjusted book value per share of IndusInd Bank increased from Rs.35.20 on 31-Mar-09 to Rs.50.27 as on 31-Mar-10. We expect the Bank to register interest income of Rs.3573.20 crore for FY’11E. Net profit for the corresponding year is expected to be Rs.464 crore. This translates into an EPS of Rs.11.3 and adjusted book value of around Rs.60. Considering the fact that the Bank is expanding its branch network, continuously adding new products and services to its existing portfolio, we recommend a “BUY” with a target price of Rs.250 over the next 6 to 9 months.