Buy IndusInd Bank; target of Rs 2120: JM Financial

JM Financial's research report on IndusInd Bank

IndusInd Bank (IIB), over the weekend, announced that it will acquire Bharat Financial Inclusion Ltd (BHAFIN, Unrated) for a consideration of INR 1,118 per share (i.e. swap ratio of 0.639) valuing BHAFIN at ~INR 155bn, a premium of 11.4% over the last closing price. The transaction values BHAFIN at 6.4x trailing BVPS and 4.2x FY19E P/BV (consensus) and will entail dilution of 14.8%. In addition, promoters of IIB will infuse capital in to the bank (through equity warrants) to keep their economic interest intact at 15% taking total dilution to 17% for existing shareholders. Notwithstanding the premium paid, we like the transaction given the multiple benefits that it brings to IIB. In our view, the transaction is unique given the upfront benefits that accrue to the bank. We see IIB’s RoA expanding above 2.2% by FY20E that can potentially be best-in-class. A NIM level comfortably above 4.25%, Tier1 above >15% and earnings growth of over 25% sustainably. We believe these are ingredients that should drive IndusInd to rerate higher. We are upgrading our earnings for FY18E/FY19E by 3%/22% factoring the merger and introduce our FY20E estimates with an EPS of INR 108/ share.

Outlook

We value IndusInd at 4.5x FY19E P/BV (which is now largely in-line with our HDFC Bank’s P/BV multiple) and raise our target price to Rs2,120 per share, 21% upside. IndusInd continues to be one of our top picks in the sector and would be buyers of the stock on any declines.

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