IndusInd Bank
BSE SENSEX
32,433
S&P CNX
10,167
15 October 2017
Update
| Sector:
Financials
CMP: INR1,750
TP: INR2,000 (+14%)
BUY
IIB announces merger with BHAFIN
Gains strong edge in rural distribution; synergies to further boost earnings
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
Financials Snapshot (INR b)
2017 2018E
Y/E Mar
NII
OP
NP
NIM (%)
EPS (INR)
EPS Gr. (%)
BV/Sh. (INR)
RoE (%)
RoA (%)
P/E (X)
P/BV (X)
74.6
66.7
36.4
4.2
60.9
26.7
387
16.9
1.8
28.6
4.5
94.6
84.8
47.0
4.2
78.6
29.0
453.4
19.0
1.9
22.2
3.8
IIB IN
598
1818 / 1038
0/12/26
1053
16.5
1589
85.0
2019E
120.8
108.7
60.3
4.2
100.8
28.3
539.5
20.6
1.9
17.3
3.2
IndusInd Bank (IIB) finally announced the long awaited merger with Bharat Financial
Inclusion (BHAFIN). As per terms of the agreement IIB will issue 639 shares for every 1000
shares of BHAFIN to the latter's shareholders. We believe that while the merger is clearly a
sweet deal for BHAFIN shareholders (swap ratio implies 11% gain for BHAFIN stock based
th
on closing price of 13 Oct, 2017), IIB is also set to benefit as merger will be accretive on
margins (~30bp), RoA (~15bp), RoE (80bp for FY20E), EPS (+3%) & Book Value (1%
dilution). In the medium term we believe that synergy benefits will arise from - (i)
Reduction in funding cost, (ii) Fee income opportunity arising from sale of PSL certificates,
(iii) Reduced risk-weights, and, (iv) Increased cross selling opportunities, and this will
further boost return ratios for the bank. Besides merger approval, board has also
approved preferential allotment of warrants to the promoters to restore their
shareholding back to 15%. We continue to like IIB for its strong earnings/business growth
and ability to deliver industry leading margins & RoA. We reiterate our BUY rating and
maintain our TP of Rs2,000 based on 4x Sept 19 BV.
Microfinance (MFI) exposure will increase to ~8% of merged loan book
IIB currently has MFI portfolio of Rs29bn (2.4% of loan book) which post the merger
will increase to ~Rs107bn and correspond to ~8% of total loans. While IIB has shown
very controlled growth in its MFI portfolio (~INR29b for the last few quarters) the
growth rate for BHAFIN has been higher at ~24% y-y. IIB indicated that over the
medium term MFI loans will form ~5% of total loans as it sees strong growth
opportunities in rest of the banking business.
Merger is largely book neutral however accretive on NIMs, EPS (from next fiscal)
and RoA (~15bps);
As per the swap ratio the merger is larger book neutral while it is EPS accretive from
FY19E particularly as the return profile of BHAFIN improves after undergoing
challenging times over recent period. We further estimate IIB to benefit on NIMs
(30bp change) and RoA (15bp change) without building in any synergies from the
merger. IIB also aims to refinance its MFI borrowings and which will enable it to
avail complete relaxation from CRR/SLR requirements.
Mix of consumer loan increases to
46%
IIB has always aimed to diversify its loan mix with a retail:corporate mix of 50:50
(from 40:60 now). The merger with BHAFIN, will add ~6.3% (to IIB’s existing loans
and ~5% to its balance sheet. Accordingly, the share of consumer finance segment
will increase to ~46% and thus takes IIB one step closer to achieve the desired
business mix.
Synergy benefits to further boost earnings; estimate RoA to cross 2% mark
In the medium term we believe that synergy benefits arising from - (i) Reduction in
funding cost as BHAFIN currently borrows at >10%, (ii) Fee income opportunity
arising from sale of PSL certificates - the entire MFI portfolio is eligible for PSL , (iii)
Shareholding pattern (%)
As On
Sep-17 Jun-17 Sep-16
Promoter
DII
FII
Others
15.0
12.6
53.8
18.6
15.0
12.7
53.9
18.4
14.9
11.6
54.7
18.9
FII Includes depository receipts
Stock Performance (1-year)
IndusInd Bank
Sensex - Rebased
1,800
1,600
1,400
1,200
1,000
Research Analyst: Nitin Aggarwal
(Nitin.Aggarwal@MotilalOswal.com); +91 22 3982 5540
| Piran Engineer
(Piran.Engineer@MotilalOswal.com); +91 22 3980 4393
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
| Anirvan Sarkar
(Anirvan.Sarkar@MotilalOswal.com); +91 22 3982 5505
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.