Buy This Large Cap Banking Stock For 26% Potential Upside, Delivered 42.09% Returns In 3 Months

Stock outlook, Returns, & Potential Upside

The Current Market Price (CMP) of stock is Rs 1,153.70 apiece. At the time of writing, the stock is trading 2.50% down from its previous close. Its 52-week low level is Rs 763.20 and 52 week high is Rs 1,275.80, respectively.

In the past 1 week, the stock has given a 6.51% negative return. Whereas, in the past 3 months, it gave a massive 42.09% positive return. In the past 1 year, it gave 1.47% negative return and in the past 3 years, it gave 25.97% negative return.

According to the brokerage's estimated target price, the stock is likely to gain 26% in 12 months, if investors buy the stock at the current market price.

Improving business outlook to support its growth trajectory

IIB is seeing a gradual recovery in loan growth over the past few quarters, led by a healthy pickup in both Corporate and Retail loans. Advances grew by ~18% YoY in 1QFY23 (v/s ~12% in FY22), with Corporate/Retail loans up ~24%/13%. An improving CV cycle and demand outlook (road operators are operating at over 90% capacity) will result in a further pick-up. Corporate growth is likely to remain healthy, which, coupled with a recovery in the economic environment and the MFI cycle (IIB expects 18-20% growth), will keep the momentum healthy. "We expect 18% loan CAGR over FY22-24," the brokerage said.

Improving liability franchise; Retail deposit mix up 400bp YoY to 41%

According to the brokerage, "IIB has been successful in strengthening its liability franchise, with an increased focus on garnering Retail deposits. The same has clocked 39% CAGR over FY20-22, with the mix as per LCR up 1,000bp to 41%. Similarly, the concentration of the top 20 depositors fell to 17% (v/s 21.7% in FY21). LCR ratio remains healthy ~124%. The management remains focused on increasing the Retail mix to 45-50%. We expect deposits to clock 16% CAGR over FY22-24."

Margin to remain broadly stable; high fixed-rate book to limit expansion

While the interest rate differential for IIB stands higher v/s its peers (25-80bp), it has narrowed in recent months. The SA rate for IIB has moderated to 3.5% v/s ~3% for large Banks. Though the CoD/CoF has moderated by 126bp/138bp since FY20, the same appears to have bottomed out and may see an increase going forward. While this, coupled with a higher mix of fixed-rate loans, will limit margin expansion, an increase in the CD ratio, with higher yields on incremental lending, is likely to keep margin stable.

Receding asset quality risks; stress from the restructuring book to remain controlled

Asset has quality has been under pressure over the past few quarters, with slippages led by the restructuring book, particularly from the MFI/Vehicle segment. However, the environment seems to be improving, with the management expecting it to gradually moderate in coming quarters. The restructuring book moderated to 2.1% of loans, with slippages in line with the management's expectation. Slippages may remain slightly higher and recoveries healthy, which will result in a gradual recovery in asset quality. "We expect GNPAs/NNPAs to moderate to 1.7%/0.4% by FY24," the brokerage said.

Credit cost set to trend lower; intends to maintain a contingency buffer

BB and below pool has moderated to 4% in 1QFY23 v/s ~7.8% in 2QFY21, which, coupled with an expectation of a resilient corporate cycle, will keep credit cost under control. The management has fully provided for its funded exposure to IDEA, with no material Corporate slippage in sight (Retail exposure slipped in 1QY23). IIB intends to utilize its COVID-19 provisions worth INR10b towards slippages from the restructuring book. The management will maintain an additional buffer of INR20b (0.8% of loans) on an ongoing basis. It reiterated its FY23 credit cost guidance of 120-150bp, while we have built in a credit cost of 1.4%/1.3% for FY23/FY24.

On track to achieve PC-5 targets; sets bigger aspirations under PC-6

Even as IIB is on track to achieve its Planning Cycle 5 (CY20-23) strategy targets, the management unveiled its Planning Cycle 6 strategy with a focus on: a) sustainably scaling up its domain business, and, b) nurturing new initiatives. The bank is strongly focused on reducing deposit concentration and increasing granularity through Retail deposits (target mix of 45-50%). Overall, the management is targeting loan CAGR to be ahead of its Planning Cycle 5 strategy, with Retail to constitute 60% of total loans. It expects a CASA ratio of over 45%, with a PPOP-to-loan ratio of over 5.5% by FY26. It is targeting a branch count of over 3k and a customer base of over 50m.

Return ratios to inch up gradually; expect FY24 RoA/RoE at 1.9%/15.7%

Prior to FY18, the average credit cost stood controlled at 0.7% over FY10-18. After FY18, exposure towards IL&FS entities, along with other stressed accounts, resulted in a sharp increase in credit cost, which was further aggravated by the COVID-19 pandemic. Thus, credit cost increased to 3.8% in FY21. "While we do not foresee a moderation in credit cost to historical levels, we expect it to moderate to 1.3% by FY24, with a gradual reduction in asset quality risks. We expect return ratios to gradually inch up to its historical levels and estimate a FY24 RoA/RoE of 1.9%/15.7%," the brokerage said.

Valuation and view

IIB is gearing up to deliver sustainable growth, fueled by continued market share gains in its key domains, while also scaling up new business verticals. Loan growth is seeing a gradual recovery, while the liability franchise continues to improve, supporting margin. This, coupled with a PCR of 72% and a contingent buffer of 1.2% of loans, will enable a sustained decline in credit costs, driving a sharp recovery in earnings. "We added IIB to our Model Portfolio, which was last published in Feb'22, and the stock has delivered ~26% returns since then. With key issues addressed, progression in earnings, and rising loan growth momentum, we expect the stock to re-rate further. We expect IIB to report 39% PAT CAGR over FY22-24, resulting in a RoA/RoE of 1.9%/15.7% in FY24. We maintain our Buy rating with a revised TP of INR1,450 (1.8x FY24E ABV)," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.