IndusInd Bank jumps 5% as brokerages remain strong despite weak Q4 earnings

IndusInd Bank shares rallied another 5 percent intraday on May 23 as brokerages remained strong despite weak earnings in March quarter.

The stock was quoting at Rs 1,599, up Rs 81.45, or 5.37 percent on the BSE, at 0925 hours IST. It had gained 4.84 percent in the previous session after positive management commentary.

The management after earnings told CNBC-TV18 that the bank wanted to put IL&FS behind in FY19 and entire exposure to IL&FS has turned into NPAs in Q4. "We made additional provisions of Rs 1,120 crore in Q4 and we expect 90–100 percent recovery from IL&FS operating company."

The private sector lender reported a massive 62.2 percent year-on-year decline in profit at Rs 360.1 crore in Q4, which was far below CNBC-TV18 poll estimates of Rs 744 crore. The sharp increase in provisions (majorly related to IL&FS) and less than expected growth in NII dented earnings growth.

"IIB's earnings were below estimates mainly due to the bank providing incrementally Rs 1,120 crore on recognizing IL&FS which had been indicated earlier. Ex-IL&FS, core performance has been decent but was weak on NII due to impact from cost of funds and was led by other income," Prabhudas Lilladher said.

"Bank explained provisions on IL&FS are enough. Also, it has only 1.9 percent FB+NFB exposure to recent stressed groups, also SMA-1 & SMA-2 together remains benign at 0.6 percent of loans," he added.

Net interest income grew 11.2 percent YoY to Rs 2,232.4 crore in Q4, with loan growth at 28.6 percent YoY. "Net interest margin ex-IL&FS remained stable and with Bharat Financial, net interest margin should cross 4 percent," the management said.

Asset quality weakened with the gross NPA rising at 2.10 percent in Q4 against 1.13 percent in Q3FY19. Provisions shot up sharply to Rs 1,561 crore in the quarter ended March 2019, compared to Rs 606.7 crore in December quarter and Rs 335.6 crore in Q4FY18.

Brokerage: Motilal Oswal | Rating: Buy | Target: Rs 1,900 | Return: 25 percent

IndusInd Bank has accelerated its provisions toward the infra group and disclosed total fund+non-fund exposure of 1.9 percent toward other potentially stressed groups. The bank has achieved healthy coverage on its infra exposure, and also has healthy collateralization levels on the stressed exposure (140 percent), which will help limit credit cost during FY20 (guidance of 60bp).

Merger with Bharat Financial will strengthen the earnings profile and further boost the return ratios. We conservatively factor in higher credit cost of 100/80bp over FY20/21, resulting in 8/3 percent cut in FY20/21 earnings estimates. We, nevertheless, estimate the bank to deliver FY20/21 RoA of 2.0/2.1 percent and value the stock at Rs 1,900 (3x FY21E ABV).

Brokerage: Prabhudas Lilladher | Rating: Buy | Target: Rs 1,832 | Return: 21 percent

Bank should quickly come back on track as operationally it remains strong with better NIM+fees, control in opex and moderation in credit cost, helping deliver returns on equities of 17-18 percent in the next two years. We maintain buy with a revised target price of Rs 1,832 (from Rs 1,791) based on 3.2x multiple as we roll forward to Mar-21 ABV.