MUMBAI: Shares of IndusInd Bank have so far gained an impressive 18.7% in 2021, beating the sector index and even heavyweights such as HDFC Bank. The rally was fueled in part by liquidity, but a big push also came from the expected money that promoters would pump into the lender.
The bank’s promoters brought in the funds pledged last week and increased their stake from 13% to 15% by investing Rs2,021 crore by converting their warrants into shares. At Rs1,709 each, the promoters appear to have assigned a crore of around Rs1,29,000 for IndusInd Bank. Market value is less than approx. ₹80,000 crore as of today.
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The market value is not far today. In fact, analysts still believe valuations are modest. Those of Jefferies India Pvt Ltd maintained their buy rating with a target price of Rs1,300 per share. “We integrate the conversion of warrants into forecasts – results in a 5% increase in capital and 3% in book value per share. We reiterate our call to BUY with a target price of Rs1300 (from Rs1100) based on 2 times the adjusted PB of December 22 (price-accounting ratio), ”the brokerage said in a note dated February 17.
The injection at a premium of 60% of the current market price sent a signal not only on the valuation, but also on the commitment of developers. Having said that, what matters now is how the funds are used by the lender.
This brings us to the financial performance and expectations of IndusInd Bank for FY22. The lender’s December quarter measures have encouraged investors due to improving asset quality and optimistic management comments. Gross bad debts do not appear to have increased much and potential stress should be limited, according to management.
What investors want now is for the bank to use its capital and show growth. The December quarter showed encouraging signs on this front. Management expects the loan portfolio to increase by 15-18% in fiscal years 22-23, which would be an improvement over the low single-digit growth recorded in fiscal years 20 and 21. The vertical commercial vehicles, which is the bank’s key portfolio, is also showing a smart recovery. In short, IndusInd Bank’s capital would be used more for balance sheet growth than provisioning, which bodes well for profitability.
But here’s a caveat. The 1.8% restructured loan pile is one of the highest among banks. HDFC Securities Ltd analysts believe this is a sign that stressing resolution will take time. In addition, the business loan portfolio continues to contribute more to stress. “With the overhaul on both sides of the balance sheet, we expect the return to equity normalization to take longer and maintain our position of REDUCE with a price target of INR 749,” said a note from HDFC Securities dated February 1. .
The promoters of IndusInd Bank have shown their confidence in the lender. Investors also seem to side with promoters. But it would be good for investors to keep an eye out for stress.