IndusInd Bank jumps 3% after Morgan Stanley resumes rating

IndusInd Bank shares gained 3 percent intraday on June 18 after global brokerage firm Morgan Stanley resumed rating with overweight call as valuation is lower after underperformance last year.

The stock was quoting at Rs 1,406.10, up Rs 6.85, or 0.49 percent on the BSE at 15:12 hours IST, but it fell 15 percent in last 15 days.

“Asset quality, funding, and valuation drive our negative view on midsized lenders. But IndusInd is better placed. We project around 26 percent core pre-provision operating profit (PPoP) growth for FY19-21, helped by diversified revenues and merger synergies. Capital/PPoP is strong,” the brokerage said.

“More importantly, if management executes per its guidance, we see 20 percent upside risk to earnings, which would also drive re-rating. Our bull case implies around 80 percent upside in stock at Rs 2,500 and in base case, 21 percent upside at Rs 1,700,” it added.

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Here is why Morgan Stanley assigned overweight rating:

> Well positioned over the medium term, given: 1) strong loan growth with a well diversified portfolio;2) strong and improving retail franchise on both sides of the balance sheet;and 3) strong capital.

> However, the stock has lagged its peers over the past six months given asset quality concerns after IL&FS – likely to abate in F20/F21 given strong underwriting track record and diversified loan book.

> Return ratios should improve significantly after the BHAFIN merger given accretive ROA and higher leverage. We expect RoA and RoE improve to around 1.8 percent and around 18 percent in F21 versus the averages of around 1.7 percent and around 16 percent in F15-F19.

> Implied target P/E multiple of 16x our one-year forward earnings estimate, 10 percent below the 10-year average. We think that looks attractive in this context.

The risks to achieving its price target could be weaker-than-expected asset quality, CEO succession planning, sharper-than-expected increase in funding costs and/or material moderation in fees.

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