indusind bank q3

IndusInd Bank has moved down more than 2% as I write this post subsequent to its December quarter reports. While I don't care much about the day-to-day market prices, let's us have a look at how the bank has performed during the quarter, and how I feel about the stock. 

With 602 m shares outstanding and the stock quoting at Rs.1601.75 as of yesterday, the market cap of the bank is Rs.964 b. It earned Rs.9.85 b during the quarter. The net interest margin of 3.83% has not changed much compared to the previous quarter; but it is way down from the March 2018 margin of 3.99%. The casa ratio of 44% has remained steady all through the quarters. The cost to income of 43.65% has improved; in March 2018, it was 45.65%. But the cost of funds has gone up to 5.81% from March 2018 (5.03%). 

The true test of banking business is its loan book, its growth rate, and quality of that book. IndusInd bank's advances have increased more than 19% from March 2018. That implies an annual growth rate of 25%. The bank had gross npa of 1.14% and net npa of 0.59% which is remarkable for the private lender considering the current circumstances. In fact, the net npa (percent) has remained quite steady during the last four quarters. Restructured advances were Rs.1.86 b as of December 2018. 

The book value per share stood at Rs.438.48. But that is not the correct measure of the bank's equity. After adjusting for all stressed assets, the book value is Rs.418.30 per share. Now to price the stock, we can pick a multiple; and the expected rate of return for the investor will depend upon that multiple. 

Let's keep the investment period of 3 years and annual loan growth rate of 20%. At a price-book multiple of 2, investment return over the 3-year period is going to be negative. The bank probably deserves a better rating considering its growth rate and quality of assets. At 2.50x, the expected rate of return is a little over 4% which is not much. At 3.5 times book, the expected rate of return is more than 16%, and at 4x, it is more than 21%. We can play with the multiple, but if we consider 3 times book as fair, the investors stand to make about 11% on the stock over a period of 3 years. Whether 11% is good or bad depends upon the individual investor's own opportunity costs. 

For any bank, capital is key to its growth expectations. Any increase in advances will have to be matched by increase in equity capital. IndusInd bank's Tier 1 capital is quite fine at 13.78%. A growth rate of 20% should not be too difficult for the bank considering the superior quality of its assets. The bank's return of assets and return on equity are pretty decent too. 

IndusInd is a well managed bank; but then to buy at its current price, the expected rate of return will have to be modest.