The banking sector in India is currently facing liquidity challenges, with higher interest rates, inflationary pressures, and tight liquidity impacting banks’ ability to lend efficiently. Despite these challenges, the banking and financial system remains the backbone of India’s economy, facilitating capital flow, supporting businesses, and driving growth across sectors.
Both private and public sector banks (PSUs) play a crucial role in the financial ecosystem. Private banks have expanded rapidly, offering innovative products and digital banking solutions, catering to growing consumer demand. On the other hand, PSUs continue to provide a strong foundation in rural and semi-urban areas, supporting government initiatives and financial inclusion. With India’s growing economy and increasing financial needs, the banking sector has significant growth potential and a promising future.
Reason for Correction in Share Price
The stock of the private sector lender dropped sharply from INR 1500 to INR 950, marking its biggest decline in four years. This 37% fall was primarily driven by the higher provisions the bank made for slippages in its microfinance (MFI) portfolio.
As a result, the bank’s net profit for September 2024 fell to INR 1,325 crores, a significant 40% decrease compared to INR 2,181 crores in September 2023. The increased provisions and lower profit affected investor sentiment, leading to a sharp decline in the bank’s stock price.
Rationale Given by Motilal Oswal
Target Price and Upside Potential
Motilal Oswal has a “BUY” recommendation on IndusInd Bank with a target price of INR 1500, which reflects a potential upside of 51% from the current market price (CMP) of INR 991. The positive outlook indicates confidence in the bank’s growth prospects and overall performance in the coming years.
Earnings Per Share (EPS) Growth
According to the brokerage house IndusInd Bank’s EPS is projected to grow significantly, with estimates of INR 128.2 for FY25E, and INR 163.1 for FY26E. This indicates a strong growth trajectory, particularly in FY25 and FY26, with a YoY growth of 35.1% in FY25E and 27.2% in FY26E, highlighting solid earnings expansion.
Valuation Metrics
Additionally, according to Motilal Oswal, IndusInd Bank’s P/E ratio is forecasted at 10.4x for FY25E and 7.7x for FY26E, reflecting an attractive valuation compared to its peers. The P/B ratio stands at 1.1x for FY25E, indicating the stock is trading near book value, which suggests potential for capital appreciation.
Return on Equity (ROE)
The ROE is also projected to increase to 11.2% in FY25E and 13.6% in FY26E. This indicates improved profitability and efficient utilization of shareholders’ equity, further strengthening the bank’s financial performance and long-term growth potential.
Share Price
Currently, shares of the IndusInd Bank are trading at Rs. 982 down by 1.62% from its previous close of Rs. 997.95 as of December 13, 2024
Conclusion
Despite recent challenges in the banking sector and a significant share price correction, Motilal Oswal remains optimistic about IndusInd Bank’s future. The brokerage’s bullish stance is supported by strong projected earnings growth, attractive valuation metrics, and improving return on equity.
With a target price of INR 1500 offering a potential 51% upside, the recommendation reflects confidence in the bank’s ability to navigate current market complexities and deliver value to shareholders in the coming years.
Written By: Dipangshu Kundu
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