Indusind bank: A case for value

Is the Market Overreacting? A Value Investor’s Analysis of IndusInd Bank’s Recent Decline

IndusInd Bank stock corrects

Source: Google Finance

The stock price of IndusInd Bank has recently experienced a significant correction, hitting a new 52-week low of ₹1,018. On the day the bank announced its second-quarter results for the financial year 2024-2025, the stock dropped by nearly 20%. Such a large price movement naturally attracts the attention of value investors, who would be keen to explore whether the underlying risks justify this drop. Was the fall in price warranted, or has the market overreacted? Is the current price reflective of the actual risks? These are the questions we aim to answer in this analysis.

As of this writing, the stock has partially recovered to ₹1,052. Let’s begin by examining the quarterly results that triggered this correction.

Q2 FY 2024-25 Results Overview

Source: IndusInd Bank Q2 FY25 investor presentation

On October 24, IndusInd Bank reported its quarterly results. The bank’s net profit declined by 39% to ₹1,325 crore, down from ₹2,181.5 crore in the same quarter of the previous year. This drop in profitability was primarily due to an increase in provisions and contingencies, which rose to ₹1,820 crore from ₹947 crore a year earlier. Included in this figure is a provisional buffer of ₹525 crore, set aside to cover any potential slippages in the coming quarter.

As of September 30, total loan-related provisions stood at ₹8,412 crore, amounting to 2.4% of the total loan book. The additional buffer was established as a measure of caution against future delinquencies, particularly in the consumer loan and microfinance sectors. The bank’s provision coverage ratio (PCR) is at 70%, indicating that it has reserved funds to address anticipated bad loans. A high PCR is generally seen as prudent, suggesting that the bank has adequately prepared for potential loan defaults.

Loan Book Composition and Key Risks

Source: IndusInd Bank Q2 FY25 investor presentation

Examining the loan book composition of IndusInd Bank, we find that consumer finance accounts for 53% of the total loans, with microfinance making up 9%, vehicle finance 25%, and non-vehicle finance 19%. The remaining 47% of the loan book consists of corporate lending. Notably, the rise in non-performing assets (NPAs) is primarily attributed to the microfinance and credit card segments, as well as to vehicle finance, especially in the tractor segment.

IndusInd Bank’s significant exposure to vehicle finance and microfinance has historical roots. The bank was originally promoted by the Hinduja family, which also owns Ashok Leyland, India’s second-largest commercial vehicle manufacturer. In June 2004, IndusInd Bank merged with Ashok Leyland Finance, the vehicle finance arm of Ashok Leyland. The share transfer ratio for the merger was fixed at 9 shares of the bank for every 4 shares of Ashok Leyland Finance.

Source: https://economictimes.indiatimes.com/

In 2019, IndusInd Bank merged with Bharat Financial Inclusion, a microfinance institution previously known as SKS Microfinance. The merger terms involved offering 9 shares of IndusInd Bank for every 1,000 shares of Bharat Financial. To maintain their shareholding, the bank’s promoters also contributed additional capital via preferential share warrants at ₹1,709 per share. This merger enabled the bank to meet the Reserve Bank of India’s priority sector lending targets internally. The priority sector lending norms mandate that a certain percentage of a bank’s loans must be directed to sectors deemed essential by the government, such as agriculture and microfinance.

Source: https://economictimes.indiatimes.com/

Historical Challenges and Promoter Support

Source: Google Finance

During the collapse of Yes Bank, market rumours cast doubt on the health of IndusInd Bank. The COVID-19 pandemic further impacted its stock price, which plummeted from a 52-week high of ₹1,525 on January 3, 2020, to a low of ₹313 on April 3, 2020. In response, the promoters infused additional capital to maintain their 26% shareholding. Following this support, the stock recovered, reaching an all-time high of ₹2,038.

India’s post-COVID economic recovery has been K-shaped, with rural areas lagging behind urban centres. This uneven recovery has particularly affected the agricultural sector in eastern India. In the microfinance segment, borrowers have increasingly become over-leveraged, taking loans from multiple sources. To address potential risks, the bank has prudently set aside a ₹525 crore provision to cover expected delinquencies.

Financial Health and Growth Prospects

Source: IndusInd Bank Q2 FY25 investor presentation

Despite recent setbacks, the bank’s financial foundation remains solid. It has a Tier 1 capital ratio of 16.5% and Tier 2 capital of 1.4%. The promoters currently hold a 16.36% stake in the bank and have expressed a willingness to inject fresh capital if needed. Over the last decade, IndusInd Bank’s profits have grown at a compound annual growth rate (CAGR) of 20%, while sales have grown at 19%.

Source: IndusInd Bank Q2 FY25 investor presentation

The bank’s current gross NPA ratio stands at 2.11%, with net NPAs at 0.64%. Its book value is ₹807 per share, and it trades at a price-to-earnings (P/E) ratio of 10.5. Assuming the bank continues to grow at the same rate, its book value could reach approximately ₹1,100 in two years. At the current price, it trades at around 1.27 times its book value. For a long-term investor with a 10-year horizon, the stock could offer substantial gains, given that Indian banking stocks generally trade at an average of 2.06 times their book value. Additionally, the bank declares regular dividends, with a current dividend yield of 1.51%.

Conclusion

For value investors, the recent price correction in IndusInd Bank presents a desirable opportunity. The bank has taken proactive steps to build a buffer against future risks, especially in the microfinance and consumer finance segments. While the recent quarterly results were disappointing, the bank’s fundamentals—strong promoter support, prudent provisioning, and a history of solid growth—suggest resilience. If the bank continues to grow at its historical rate, patient investors may find value in holding the stock over the long term, benefiting from both capital appreciation and dividend income.

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