CLSA Offers Contrarian Outlook on IndusInd Bank Amidst Market Volatility

In a bold move, CLSA has reaffirmed its Outperform rating for IndusInd Bank, adjusting its target price to Rs 900 per share. This new target reflects a significant reduction from the previous estimate of Rs 1,300, primarily due to a 9-25% cut in growth forecasts. Despite this downward revision, the target suggests a potential upside of over 30% from current market levels.

CLSA’s Insights on IndusInd Bank’s Market Position

CLSA draws interesting parallels with past situations involving other banks such as RBL Bank and Yes Bank. They emphasize that while market sentiment may fluctuate in the short term, it is the fundamental performance of the bank that ultimately drives stock prices. For instance, when the RBI provided a one-year extension to RBL’s managing director, the stock plummeted by 60% due to investor concerns about undisclosed issues. However, as time passed and no significant problems surfaced, the stock managed to recover. CLSA believes a similar scenario could unfold for IndusInd Bank.

What Lies Ahead for IndusInd Bank?

With the share price facing continued pressure, CLSA speculates on the potential next steps for IndusInd Bank. They foresee ongoing uncertainty regarding undisclosed issues and the continuity of management. Should the RBI appoint a public sector banker to the leadership role, it could further dampen investor sentiment. Additionally, the possibility of lenders invoking a stock pledge by the bank’s promoters adds to the existing uncertainties. Nevertheless, CLSA is optimistic that if IndusInd Bank meets its performance expectations in the coming 4-6 quarters, investor concerns will likely diminish.

Potential Positives for IndusInd Bank

Despite the challenges, CLSA identifies several near-term positives for IndusInd Bank:

• Recovery in microfinance sectors
• Improved margins due to better liquidity in the banking system and potential rate cuts

Moreover, there is a possibility of a non-fundamental boost if the bank’s promoter secures RBI approval to increase their stake post the acquisition of Reliance Capital.

The Role of RBI in IndusInd Bank’s Future

The CLSA report highlights the mixed signals coming from the RBI. While the one-year extension for the managing director mirrors actions taken with RBL Bank, the RBI has been proactive in addressing issues within financial institutions over the last couple of years. Notably, the recent accounting discrepancies were not flagged by either the bank’s auditors or the RBI during the past 5-7 years. CLSA argues that the RBI’s decision to limit the MD’s tenure might not necessarily indicate asset quality issues; other factors could be at play. They also note the contrasting approaches taken in the cases of Yes Bank and RBL Bank, where both stocks eventually recovered after initial downturns.

In conclusion, CLSA maintains a cautiously optimistic outlook on IndusInd Bank, suggesting that the bank’s underlying fundamentals could prevail over the current market sentiment if they can deliver consistent performance in the near future.