Indusind Bank: 1245-1265 May Be A Big Technical Hurdle Despite In line With Estimates Q3FY17 Result & Upbeat NII; Adverse Effects Of Demonetization On 25% Growth Story & Robust Loan Portfolio May Be Visible From Q4 & Subsequent Quarters

Date: 22/01/2017 (21:30)

Trading Ideas: IIB

CMP: 1220

Sell on rise around 1245-1265

TGT: 1190*-1115 & 1035*-995 (1-6M)

TSL> 1285 OR >1305

Note: Sustaining above 1285, IIB may rally towards 1305, which should offer another strong resistance level and consecutive closing above 1305 for any reason, IIB may further rally towards 1345*-1395 & 1435*-1480 in the near to long term (under bullish case scenario from the current trading level).

Any one holding or desirous to hold long position in IIB, may also watch 1190-1180 zone as immediate positional support of the stock.

As par normal growth matrix, current fair valuation of IIB may be around: 995 (Q3FY17 TTM) and projected fair valuation may be around 1085 (FY-17E) & 1365 (FY-18E).

PROJ EPS(ANALYST)		48.9	48.9	58.25
Valuation Metrics	Q3FY17	Q4FY17E	FY-17E	FY-18E
AVG EPS	45.12	49.19	49.19	61.96
AVG PE	22	22	22	22
AVG FAIR VALUE	992.64	1082.16	1082.16	1363.13

Although IIB has shown a spectacular sets of numbers in Q3FY17 despite demonetization blues, it’s may be too early to take a call that the bank has defied all the concerns of a slowing economy as a result of “war on black/unaccounted money” as various “loopholes” were available in the system to launder or exchange the old currency notes. Actual effect of demonetization, if any may be more visible from Q4FY17 and subsequent quarters.

Looking forward, for IIB to break the 1285-1305 zone convincingly Nifty also has to sustain above 8485-8510 area; otherwise it may be very tough for IIB to break this positional resistance zone for a new life time high towards 1345-1480 zone.

No doubt, IIB is a great story in private banking space being a relative new entrant and very cautious about its credit portfolio (both business & retail banking). It has a consistent CAGR story of 25-30% in the past few years; but cumulative growth in the EPS has moderated in the last one year, where CAGR came at around 13.43% between FY-15 & FY-16. Thus the magic CAGR of 25% for IIB may be moderating on the back of consistent equity dilution, competition from other peers and new entrants, brand recalls & digitalization. India may not be a place for so much banks running behind a limited set of privilege clients and although, IIB may be expanding rapidly through branch & ATM additions, it may not be so fast in acquiring niche sets of clients.

Apart from concerns of corporate loan portfolio due to various legacy issues and probable economic slowdown due to demonetization, SME & retail loan portfolio may also come under severe stress for cash flow mismatch issues for not only demonetization, but may be also for the Govt stance of “war on black/unaccounted money”.

Apart from employees of a reputed corporate (Salary Account), banks generally do not extend credit to any retail clients (SME/Personal), who are not “wealthy”; i.e. not backed by on or off balance sheet assets/funds (white or black money). After “surgical strike on the black money” & destruction or lock in of the “wealth”, it may take significant time to rebuild or redistribution of the same. Only demonetization may be transitory and along with pace of remonetization, cash flow activities will be normal in the coming days (in fact, it’s now already in normalized level). But the long term effect of “war on black money & corruption/money laundering” may be very painful for the Indian consumption story and also for the banking NPA/stressed assets.

Apart from the demonetization & slowing economic activities, retail banking assets may also be adversely in the months ahead as a result of Trump’s “America First” rhetoric, trade barriers and increasing thrust of automation in India, especially for the IT sector, which may be one of the prime sets of banking clients. Although, IIB is relatively a new generation bank, it’s may not be an exception from the overall stress in the banking sector in the days ahead.

As a result of demonetization & GST (if implemented in 2017-18), it may be very difficult for the SMES, small & unorganized business entities to even survive the competition by paying full compliance costs of its business. On the other side, these informal sectors of the economy may go to the formal way of bank lending and can integrate with the formal economy. Flushed with demonetized funds (easy money), banks may also extend credit like in 2010-12 or 2007-08 (pre recession era) for its credit growth, but that may translate into another wave of NPA bubbles in future, specially for the SME/retail loan assets. IIB may not be an exception of this also.

For IIB: Q3FY17 (Rs.in cr)

PAT: 750.64 (estimate: 720.50; YOY: 581.02; QOQ: 704.26)

NII: 1578.42 (estimate: 1502.60; YOY: 1173.42; QOQ: 1460.31)

EPS (diluted): 12.46 (estimate: 12.06; YOY: 9.68; QOQ: 11.69); i.e. IIB beats Q3 EPS estimates by 3.3%

Actual Q3FY17 TTM EPS: 45.12

Average PE: 20-25 (based on previous CAGR of 25%)

Average fair valuation (Q3FY17 TTM): 902-1128 (1015)

Projected Q4FY17 EPS: 13.45* 

Projected Q4FY17 TTM EPS (FY-17): 48.90*

Projected fair valuation (FY-17): 978-1222 (i.e. 1100)*

Projected FY-18 EPS: 58.25 *

Projected fair valuation (FY-18): 1165-1456 (i.e. 1311)*

* Under normal scenario without any adverse demonetization effects

As par some reports regarding long term effect of demonetization (war on black money), Indian consumer demand may fall by around 30%; in that stress scenario, EPS growth of IIB may also fall by 7.5% on a QOQ basis instead of present trend of 6.5-7% average QTR growth rate. If this trend continues, then one can expect around 15- 30% fall in FY-18 EPS for IIB also in FY-18.

In that stress case scenario: Adverse effect of demonetization:

Projected Q4FY17 EPS: 11.52 

Projected FY-17 EPS: 46.31

Projected average PE: 15-20 (based on long term average CAGR of -15% to +30%)

Projected fair value (FY-17): 695-926 (i.e. 810)

Projected FY-18 EPS: 39.36 (assuming average 15% negative growth)

Projected fair value (FY-18): 590-787 (i.e. 688)

Q4FY17 result of IIB may be an indication of any adverse effect on the core earnings of the bank and if everything is normal and demonetization narrative is wrong, then 1035-995 area may be an ideal zone for investors, planning for a fresh entry.

More update: 26/01/2017

In Q3FY17, IIB beats the NIM primarily based on strong loan growth (at Rs.102770 Cr; 25% YOY; 4% QOQ) and stable margin (4% NIM). As par the management, the effect of demonetization on the cost of funds is largely neutral (0.24% fall in cost of funds was neutralized by similar fall in yield on assets); but as large part of the loan portfolio is at fixed rate, the falling interest rate regime didn’t affect IIB much in Q3FY17.

The strong growth in loan disbursal (better than the industry) came on the back of well diversified portfolio and robust corporate & retail advances. Almost 58% of Q3 advances belong to corporates and rest retail (Vehicle & Non-Vehicle). CV finance may be the core lending business of IIB for the last few years and in Q3, it was around 33% of the total retail advance. However, after clocking impressive growth of around 33% in FY-16 and 14.9% in Q2FY17, this CV finance has moderated to 10% in Q3FY17-YOY (QOQ: 2.5%). This may be an initial impact of demonetization as enquiries for CV loan was drastically fallen immediately after Nov’8 and till Dec’16 (1^st week as par the management). But the management is confident about pick up in Q4FY17 as there is inherent demand for it and is already seeing signs of normalization from 2^nd week of Dec’16. Overall, retail-vehicle loan portfolio also saw an impressive growth of 21% (YOY) & 5% (QOQ)

The other part of retail loan portfolio (i.e. credit card, gold loan, used vehicles finance, LAP, personal car loan-PV) constitutes around 10% of total advance and grown quite healthy by around 42% (YOY) and 8% (QOQ), although on a much smaller base (Rs.10146 cr).

Going forward, management has given an indication of 20% overall growth in loan portfolio against 25% clocked in Q3FY17.

IIB was able to maintain its NIM of 4% primarily because majority of its loans (almost 70%) come under fixed rate, which has helped the bank to counter the fall in yields. Traditionally, IIB offers comparatively higher interest rate (5-6%) on some specialized savings account deposits and going forward the bank may reconsider those high savings rate to normal level (4%). After demonetization, IIB got windfall deposit growth in CASA deposits as all other banks and continuation of higher savings rate for further period may cost the bank dearly, even at lower rate, if there will be no corresponding uptick in loan demand. IIB may also link all of its loan accounts to MCLR rather than fixed rate in the coming months; otherwise it may see loan demand falling on the back of lower MCLR employed by other banks.

Prior to Q3FY17 numbers, analysts wee skeptical about immediate adverse effect of demonetization on the bank, specially where a significant part of its loan portfolio is linked with SMES; CV & LAP (loan against property) portfolio was expected to be hit hard after demonetization, but IIB has defied all such concerns and in the process, also surprised the market with its NIM expansion & loan growth. 

Although, pace of net NPA may have also accelerated in Q3FY17 (YOY: 46.59%; QOQ: 8.54%), % of net NPA to total loans was not alarming (YOY: 18.18%; QOQ: 5.41%) and was quite modest s par the analysts. Overall, IIB seems to held up its asset quality in Q3FY17 despite all the demonetization narratives. But, some analysts are also concerned that IIB may lower its compliance/quality level in Q3 after demonetization while granting loans for the sake of getting business (volume) in a falling demand environment after demonetization. Going forward, Q4FY17 may be a better indication.

From the overall media interaction, it seems that the management is also cautious about Q4FY17 & Q1FY18 outlook as in its own word, “IIB is not made of Teflon coated” and any adverse effect of the demonetization on the overall economy & banking sector is also bound to fall on IIB, even with a time lag. As par the management, only two partial months in Q3 (Nov & Dec) were effected for demonetization and Oct’16 was quite normal & robust too ( may be due to festival demand & 7CPC induced liquidity). So, one can’t expect too much adverse effects for Q3FY17 on a generalized basis and for that one has to wait for Jan-March’17 QTR (Q4) for any real indication of prolonged slowdown on the economy for demonetization and “war on black money”. IIB may be also concerned about adverse effect on the MSME loan portfolio after demonetization because of their cash dependence nature of business and it may be quite visible in Q4FY17 and subsequent quarters. We may see some types of “watch list” from IIB too in the coming quarters (like it Private peers Axis/ICICI).

Another area of concern was micro finance (MFI), which may be the reflection of rural economy, especially after demonetization pain. But, as par the management, the slowdown was reverted after four weeks of demonetization announcement and it sees a better opportunity in the 2-W loan market, which was largely (80%), operated by “cash” before demonetization. Now, that portion may come under formal 2-W finance (EMI based), which may be a business opportunity for all the banks, including IIB. 

It’s a well known fact that after demonetization, there was surge in repayments of loans in old notes (SBN), even for NPA/Write off accounts. IIB may also be one of the beneficiaries of that. But, no one is sure, how the IT dept will treat those cases, where there is clear indication of money laundering, even for loan repayments. Incidentally, IIB management has indicated that it has got Rs.700-800 cr of SBN(s) for such repayment and that’s not unusual (?).

IIB management is also hopeful about cross selling (other distribution income by selling MF, insurance etc) to bank’s customers, especially after high demonetized bank deposits. After demonetization, it’s a business opportunity for banks to sell “cross sale/distribution products” on the background of falling savings interest rate and IIB is also not an exception to that, being a traditional niche player in this segment. In fact, in Q3FY17, IIB saw a Cross sale/distribution fees of Rs.181.24 cr, which is up by 44% (YOY) & 16% (QOQ).

As there were various loopholes available to launder black/unaccounted money, even with the banking channel prior to 31^st Dec’16, it may be no great surprise for incremental surge in loan repayments or investments (cross sale), made from the deposit accounts, and even out of demonetized notes. Going forward, all will depend upon the stance of Govt/IT to further extend its “war on black money” & demonetized money trail, deposited in bank accounts. 

Also, this trend may not be there after Q3/Q4FY17, when restrictions on bank withdrawal will end by Feb’17 end (most probably). The stupendous loan growth in Q3FY17 for the IIB has happened, may be because the bank has extended credit on the back of surge in demonetized deposits (by partly converting it into STDR/FD and giving loan against it). IIB has got deposits for around Rs.119218 cr and made advances for Rs.102770 cr in Q3FY17 and a large part of its deposit surge must be old demonetized notes; it may be also interesting to know, how the branch personnel of IIB has got so much time to process loan requests, even in the period of currency management stress till 31^st Dec’16 after demonetization, whereas all the other major banks has clearly indicated about time constraint for effective sales/loan processing.

For IIB, provision coverage ratio (PCR) for Q3FY17 is 59% (QOQ: 59%; FY-16: 59%); it was 63% for FY-15 & 70% for FY-14. As par RBI guidelines, a PCR of 70-75% may be ideal and in that sense, IIB may be lagging to some extent.

IIB may be a great portfolio stocks in the Indian banking space due to its phenomenal growth in EPS (earnings) in the last few years (nearly 133% in the last four years). As a result market also gave handsome returns for the stock by more than 491% since 2012, when it was around 215. The stock enjoys substantial premium (PE-25/30) in comparison to its peers, primarily because of its consistent EPS growth (CAGR) of around 25-30% over the years and in the stressed Indian banking system, where its big brothers (Axis, ICICI) are in deep trouble due to its legacy issues of NPA, IIB being a new generation bank having great professional & experienced management team at the helm has grown tremendously for its prudent mix of loan book and stress on the CV finance, comparatively lower exposure to the stressed sectors (cement, steel, power) and thus being seen as one of the pillar in the Indian private bank space. Although, the stressed Indian credit cycle of 2007-08 & 2010-12 has not affected it, being a new entrant & smaller size, driven by an experienced management team, the growth rate of the bank may be saturating and going forward, benefit of lower base effect may not be there.

Also, demonetization and the stance of “war on the black/unaccounted money” stance by the Govt may be quite right, but the process & implementation may be debatable and it may cause long term economic disruption for the Indian economy, if redistribution of wealth do not happen fast & smoothly. Thus, banking sector may come under triple whammy of huge unutilized demonetized deposits, lower credit demand and incrementally higher stressed assets (NPA/NPL). In that scenario, business loans including CV finance and also personal loans & SME portfolio of IIB may also come under significant pressure.

Thus, for an investor, accumulation on dips (around 1035-995) may be a good investment idea rather than chasing it at lifetime highs; going forward IIB may be a market performer rather than an outperformer.

 IIB

Results summary & comparison:

IIB-QLY	Dec '16	Sep '16	Jun '16	Mar '16	Dec '15	YOY	QOQ	AVG	AVGR	SGR	PROJ	Q4FY17	Q1FY18
Interest Earned
(a) Int. /Disc. on Adv/Bills	2,990.45	2,816.85	2,682.14	2,557.81	2,367.77	26.30	6.16	2606.14	14.75	5.87	8.34	3239.80	3509.94
(b) Income on Investment	619.79	563.21	527.06	484.9	431.81	43.53	10.05	501.75	23.53	9.14	13.40	702.83	797.00
(c) Int. on balances With RBI	60.88	60.61	52.93	57.26	96.09	-36.64	0.45	66.72	-8.76	-15.11	-8.14	55.92	51.37
(d) Others	28.21	28.63	29.56	31.72	32.03	-11.93	-1.47	30.49	-7.46	-3.10	-3.75	27.15	26.13
INTEREST INCOME	3,699.33	3,469.30	3,291.69	3,131.69	2,927.70	26.36	6.63	3205.10	15.42	5.91	8.64	4018.88	4366.03
Other Income	1,016.80	970.42	972.97	912.8	839	21.19	4.78	923.80	10.07	4.80	6.24	1080.21	1147.57
TOTAL OP.REVENUE	4,716.13	4,439.72	4,264.66	4,044.49	3,766.70	25.21	6.23	4128.89	14.22	5.66	8.10	5098.26	5511.36
EXPENDITURE
Interest Expended	2,120.91	2,008.99	1,935.27	1,863.48	1,754.28	20.90	5.57	1890.51	12.19	4.77	6.94	2268.08	2425.47
Employees Cost	394.04	375.79	356.89	336.41	326.7	20.61	4.86	348.95	12.92	4.78	6.93	421.34	450.53
Other Expenses	837.84	773.29	738.71	693.41	624.74	34.11	8.35	707.54	18.42	7.37	10.66	927.19	1026.07
TOTAL OP.EXPENDITURE	3,352.79	3,158.07	3,030.87	2,893.30	2,705.72	23.91	6.17	2946.99	13.77	5.40	7.83	3615.27	3898.30
EBITDA	1,363.34	1,281.65	1,233.79	1,151.19	1,060.98	28.50	6.37	1181.90	15.35	6.32	8.79	1483.20	1613.59
Depreciation	0	0	0	0	0	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
EBITA	1,363.34	1,281.65	1,233.79	1,151.19	1,060.98	28.50	6.37	1181.90	15.35	6.32	8.79	1483.20	1613.59
Provisions & Contingencies	216.85	213.88	230.47	213.66	177.08	22.46	1.39	208.77	3.87	4.79	3.92	225.34	234.17
Exceptional Items	0	0	0	0	0	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
PBT	1,146.49	1,067.77	1,003.32	937.53	883.90	29.71	7.37	973.13	17.81	6.63	9.81	1258.98	1382.51
Tax	395.85	363.51	341.94	317.18	302.88	30.70	8.90	331.38	19.46	6.88	10.73	438.31	485.33
PAT	750.64	704.26	661.38	620.35	581.02	29.19	6.59	641.75	16.97	6.51	9.34	820.74	897.40
Equity Share Capital	597.42	596.92	595.87	594.99	593.64	0.64	0.08	595.36	0.35	0.16	0.19	598.54	599.66
EPS	12.56	11.80	11.10	10.43	9.79	28.38	6.50	10.78	16.58	6.34	9.13	13.71	14.96
EPS(REPORTED)
Basic EPS	12.57	11.81	11.11	10.43	9.8	28.27	6.44	10.79	16.52	6.32	9.09	13.71	14.96
Diluted EPS	12.46	11.69	10.64	10.33	9.68	28.72	6.59	10.59	17.71	6.44	9.48	13.64	14.93
TTM EPS	45.12	42.34										48.43
NPA Ratios :
i) Gross NPA	971.62	899.01	860.64	776.82	681.13	42.65	8.08	804.40	20.79	8.91	12.11	1089.28	1221.18
ii) Net NPA	400.7	369.16	355.5	321.75	273.34	46.59	8.54	329.94	21.45	9.48	12.78	451.91	509.66
i) % of Gross NPA	0.94	0.9	0.91	0.87	0.82	14.63	4.44	0.88	7.43	3.42	4.74	0.98	1.03
ii) % of Net NPA	0.39	0.37	0.38	0.36	0.33	18.18	5.41	0.36	8.33	4.17	5.61	0.41	0.44
NET INTEREST INCOME (NII)	1,578.42	1,460.31	1,356.42	1,268.21	1,173.42	34.51	8.09	1314.59	20.07	7.54	11.08	1753.35	1947.67
NIM (REPORTED %)	4.00	4.00	3.97	3.91	3.70	8.11	0.00	3.90	2.70	1.92	1.66	4.07	4.13
OPM(%)	28.91	28.87	28.93	28.46	28.17	2.63	0.14	28.61	1.05	0.65	0.62	29.09	29.27
NP(%)	15.92	15.86	15.51	15.34	15.43	3.18	0.34	15.53	2.46	0.79	1.10	16.09	16.27
IIB-YLY	Mar '16	Mar '15	Mar '14	Mar '13	Mar '12	YOY	QOQ	AVG	AVGR	SGR	PROJ	FY-17	FY1-8
Interest Earned
(a) Int. /Disc. on Adv/Bills	9,244.56	7,716.91	6,627.35	5,610.30	4,216.62	119.24	19.80	6042.80	52.98	19.80	30.60	12073.23	15767.42
(b) Income on Investment	1,780.63	1,680.42	1,477.03	1,282.50	1,078.20	65.15	5.96	1379.54	29.07	12.71	16.01	2065.68	2396.35
(c) Int. on balances With RBI	408.5	277.3	148.5	85.5	23.86	1612.07	47.31	133.79	205.33	69.96	181.40	1149.54	3234.84
(d) Others	146.97	17.34	0.65	4.93	40.52	262.71	747.58	15.86	826.67	626.64	566.64	979.76	6531.49
Other Income	3,296.95	2,403.87	1,890.53	1,362.96	1,011.78	225.86	37.15	1667.29	97.74	32.19	55.89	5139.57	8012.00
TOTAL OP. REVENUE	14,877.61	12,095.84	10,144.06	8,346.19	6,370.98	133.52	23.00	9239.27	61.03	21.86	34.82	20057.45	27040.72
EXPENDITURE
Interest Expended	7,064.09	6,271.69	5,362.82	4,750.37	3,654.95	0.00	0.00	0.00	0.00	16.38	4.10	7353.43	7654.62
Employees Cost	1,236.09	980.48	809.29	661.46	485.47	154.62	26.07	734.18	68.36	24.04	39.28	1721.67	2397.99
Other Expenses	2,436.01	1,745.45	1,375.99	1,094.90	857.53	184.07	39.56	1268.47	92.04	28.44	51.52	3690.96	5592.42
TOTAL OP.EXPENSES	10,736.19	8,997.62	7,548.10	6,506.73	4,997.95	114.81	19.32	7012.60	53.10	19.43	30.14	13971.91	18182.83
EBITDA	4,141.42	3,098.22	2,595.96	1,839.46	1,373.03	201.63	33.67	2226.67	85.99	29.88	49.99	6211.56	9316.48
Depreciation	0	0	0	0	0	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
EBITA	4,141.42	3,098.22	2,595.96	1,839.46	1,373.03	201.63	33.67	2226.67	85.99	29.88	49.99	6211.56	9316.48
Provisions & Contingencies	672.16	389.05	467.63	263.1	180.38	272.64	72.77	325.04	106.79	41.29	72.25	1157.81	1994.35
Exceptional Items	0	0	0	0	0	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
PBT	3,469.26	2,709.17	2,128.33	1,576.36	1,192.65	190.89	28.06	1901.63	82.44	28.68	46.72	5090.19	7468.45
Tax	1,182.81	915.45	720.31	515.18	390.04	203.25	29.21	635.25	86.20	30.10	49.08	1763.32	2628.75
PAT	2,286.45	1,793.72	1,408.02	1,061.18	802.61	184.88	27.47	1266.38	80.55	27.98	45.55	3328.03	4844.08
Equity Share Capital	594.99	529.45	525.64	522.87	467.7	27.22	12.38	511.42	16.34	6.05	10.39	656.83	725.09
EPS	38.43	33.88	26.79	20.30	17.16	123.93	13.43	24.53	56.66	21.83	30.73	50.24	65.67
EPS Before Extra Ordinary
Basic EPS	39.68	33.99	26.85	21.83	17.2	130.70	16.74	24.97	58.93	21.88	32.56	52.60	69.72
Diluted EPS	39.26	33.41	26.41	21.4	16.86	132.86	17.51	24.52	60.11	22.16	33.25	52.31	69.71
NPA Ratios :
i) Gross NPA	776.82	562.92	620.79	457.78	347.08	123.82	38.00	497.14	56.26	22.12	36.83	1062.93	1454.43
ii) Net NPA	321.75	210.48	184.05	136.76	94.67	239.86	52.86	156.49	105.60	33.15	62.90	524.11	853.76
i) % of Gross NPA	0.87	0.81	1.12	1.03	0.98	-11.22	7.41	0.99	-11.68	-1.67	-2.19	0.85	0.83
ii) % of Net NPA	0.36	0.31	0.33	0.31	0.27	33.33	16.13	0.31	18.03	7.36	12.46	0.40	0.46
PROJ EPS(ANALYST)		48.9	48.9	58.25
Valuation Metrics	Q3FY17	Q4FY17E	FY-17E	FY-18E
AVG EPS	45.12	49.19	49.19	61.96
AVG PE	22	22	22	22
AVG FAIR VALUE	992.64	1082.16	1082.16	1363.13