INDIE App And Bharat Vikas Banking Will Secure Future Stability

Key Takeaways

• Strategic shift to retail deposits and operational efficiency targets enhanced cost management, potentially improving net interest margins and long-term profitability.
  
• Digital banking growth and diversification strategies aim to attract tech-savvy customers and stabilize earnings, reducing reliance on cyclical segments.
  
• Elevated stress across microfinance, specific regional concentrations, and corporate yields may pressure margins, asset quality, and future profitability.

Catalysts

Engages in the provision of various banking products and services to individuals, NRIs, business owners, corporates, and government and financial institutions.

• The bank is focusing on increasing its retail deposit base, showing a 14% year-on-year growth. This shift towards stable retail deposits is likely to have a positive impact on cost of funds and net interest margins in the long term.
  
• Growth opportunities in the digital banking sector with the expansion of the INDIE app and increased digital engagement are expected to contribute to revenue growth by attracting more tech-savvy customers and increasing customer retention.
  
• The diversification strategy, including new initiatives like Bharat Vikas Banking and expanding merchant acquiring business, is designed to reduce dependence on cyclical segments like microfinance and is likely to stabilize earnings and improve asset quality over time.
  
• The robust growth in home loans (128% year-on-year) and affluent and NRI banking segments is expected to continue contributing to increases in revenue and net interest margins.
  
• The bank has indicated a strong focus on operational efficiency and cost management, with operating expenses now in single-digit growth, which should improve net margins and overall profitability.
  

IndusInd Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming IndusInd Bank's revenue will grow by 20.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 28.7% today to 26.3% in 3 years time.
• Analysts expect earnings to reach ₹117.0 billion (and earnings per share of ₹150.34) by about April 2028, up from ₹72.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹76.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.3x on those 2028 earnings, up from 8.5x today. This future PE is lower than the current PE for the IN Banks industry at 10.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.01%, as per the Simply Wall St company report.

IndusInd Bank Future Earnings Per Share Growth

Risks

• The microfinance segment is experiencing stress, as indicated by higher slippages and potential elevated credit costs, which could negatively impact net margins and profitability.
  
• A contraction in public CapEx and sluggish investment growth may slow down overall economic growth, affecting revenue generation across various banking segments.
  
• Corporate yields have been declining due to risk management and external benchmarking, suggesting potential pressure on net interest margins and future earnings.
  
• The high concentration of microfinance in particular states like Karnataka poses regulatory and collection risks, potentially impacting asset quality and future provisioning needs.
  
• Increased slippages in segments like tractors and small commercial vehicles, combined with elevated stress in credit card businesses, could pressure asset quality and require higher provisioning, impacting net earnings.

Valuation

• The analysts have a consensus price target of ₹936.634 for IndusInd Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1350.0, and the most bearish reporting a price target of just ₹600.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹445.1 billion, earnings will come to ₹117.0 billion, and it would be trading on a PE ratio of 9.3x, assuming you use a discount rate of 14.0%.
• Given the current share price of ₹788.25, the analyst price target of ₹936.63 is 15.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.