Indusind Bk: 1245-65 May Be A Big Hurdle Despite A Great Banking Story---NPL & Growing Competition May Drag

Trading Idea/Technical Outlook: IIB

LTP: 1221

Sell on rise around 1235-1245 OR 1285-1295;

TGT: 1195*-1180-1160-1140*-1125-1105-1090-1074-1040-1020* (1-3/6M)

TSL> 1265 OR > 1305

Note: Consecutive closing (3 days) above 1265, IIB may further rally towards 1265-1295 zone, which may again turn out to be a strong supply zone for the stock and sustaining above 1305 area for any reasons, it may further rally up to 1320-1355* & 1375*-1400 zone in the mid to long term (alternative bullish case scenario).

Traders/investors having long position in the counter, may also watch 1195*-1180 area as the nearest positional support zone.

For an investing point of view, buy on dips strategy around 1090-1020 area may be good, considering the overall market volatility.

Recent price action may be indicating that most of the "good news" is already discounted by the market to a large extent and fresh break out will only come above 1265 zone, if today's Q2FY17 result and management commentary come well above market expectations.

Fundamental Outlook:

Q1FY17 EPS: 10.64 (Diluted)

Projected Q2FY17 EPS: 11.00

Market consensus: 11.65

FY16 TTM EPS: 39.26 (Actual)

Q1FY17 TTM EPS: 40.05 (Actual)

Projected Q2FY17 TTM EPS: 41.65

Projected FY17 EPS: 45.50 (consensus 49.50)

Average PE: 24 (current PE 30.50; industry average PE 20)

Intrinsic/fair valuation : 965 (Q1FY17 TTM EPS)

Projected fair value: 1000-1015 (Projected Q2FY17 TTM EPS)

Projected fair value for FY-17: 1095-1190 (Estimated FY17 EPS)

IIB will publish its Q2FY17 result today and analysts are expecting it to report:

PAT: 700.80 cr (+6% on QOQ & +25.1% on YOY)

NIM: 1417.6 cr (+4.5% QOQ; +29.5% YOY)

NIM(%): 3.8-3.9% (expected to be stable around 4% in FY17 onwards; 72% of the loan book is at fixed rate; decline in cost of funds and high yielding diamond financing portfolio acquisition from RBS; concern is any stress in retail loans and Diamond/James & Jewelry portfolio).

Credit growth: 29%

Deposit growth: 31%

Non-Interest income: +30%

OPEX: +30% (continued branch expansion and investment in digital banking; FY117 target is 1200 branch from the Q1 level of around 1000).

But, some analysts are also concerned over reported 50% YOY increase in absolute provisions (NPA/NPL) in Q1FY17 and thus asset quality may be the prime concern for it.

Traditionally, IIB is maintaining 30% CAGR in revenue being a new generation & well managed private  bank for the last few years. But, due to unfavourable base effect and competition from the new entrants (like Bandhan Bank in the NE area), PSBS and the likes of HDFC/ICICI/Axis Banks (which are now quite active in retail banking space due to stress in corporate portfolio), it may be very difficult for the IIB to maintain an evergreen 30% growth story in the years ahead.

As CV/Consumer financing business is going for some types of saturation/stress, IIB now increasingly focusing on secured & unsecured personal loans, specially credit cards & LAP and basically targeting the same sets of "prime clients", who has multiple personal loans/credit cards courtesy the other private banks. The same is true for the MSME sector.Thus, going forward, 20% CAGR may be "new normal" for the IIB.

So, high leveraged retail clients may also be some cause of headwinds for the IIB as well as for the other Pvt banks.

We may see some moderation in the growth of "other fees" income (cross sales) because of the saturation factor. The bank is now relying more on "trading income".

Present corporate/retail loan ratio for IIB is around 52:48 and the bank is planning to shift it to 50:50 by FY18. Going ahead, the bank may give more focus on small corporates (MSME) loan portfolio for better margin and other modes of business banking. Presently MSME has 12% share for the overall corporate loan book of IIB, while large & mid size corporates has 29% & 18% share.

No doubt. IIB is a great story in the new generation Pvt banking space, but considering the recent price action most of the above sets of "good news" may be already priced in as the scrip surged by over 55% in the last 8 months (Feb'16 low). So, buy on dips strategy (accumulation at every major dips) may be good for a healthy portfolio return rather than chasing the rally.

Analytical Charts: