CLSA cuts IndusInd EPS estimates, price target; retains Outperform rating with caveats

IndusInd Bank’s  2024-25 earnings estimates have been cut 25% by brokerage CLSA factoring in the ₹15.30 billion derivative loss and by 9-10% for the next two years, anticipating slowing credit growth, higher cost of funds, concerns over potential financial discrepancies, management stability, and possible regulatory intervention. Instead of the usual three-year term, the one-year extension granted to the bank's Managing Director has raised investor anxieties. Additionally, speculation that a banker with public sector experience could be appointed as the next MD has further dampened market sentiment.

The brokerage has cut loan growth estimates by 2-4% over the next two fiscal years, as the bank could prioritise resolving governance and compliance issues over branch expansion. It has also raised the bank’s credit cost estimates for FY26, citing microfinance collection challenges in Karnataka, where 13% of IndusInd’s microfinance exposure is concentrated. As a result, the brokerage firm has cut its target price by 30% to ₹900 from ₹1,300, even as it continues to rate the stock as "Outperform," anticipating a recovery once clarity emerges.

Adding to these concerns is the prospect of the promoter’s stock pledge being called in by lenders, which could introduce further volatility. However, CLSA maintains that fundamentals will ultimately prevail, and if IndusInd Bank meets performance expectations over the next four to six quarters, these concerns will likely diminish, paving the way for a stock recovery.

Key Developments to Watch
Investor sentiment toward IndusInd Bank will be shaped by several positive and negative triggers in the coming three to six months, CLSA said. On the positive side, an external audit confirming that the financial discrepancies align with management’s estimates could help restore confidence. Additionally, if the promoter secures RBI approval to increase its stake, it would signal a long-term commitment to the bank. Another potential stabilising factor could be the board appointing an executive search firm to oversee the selection of a new CEO, ensuring a structured leadership transition.

However, several risks remain. The discovery of additional financial discrepancies could erode trust further. An unexpected departure of the MD & CEO might create leadership instability, while regulatory intervention—such as the RBI appointing a director to the board or selecting a PSU banker as MD—could hurt sentiment. Additionally,  a call on the promoter’s pledged shares by lenders could lead to heightened stock volatility, and any reports of large corporate deposit withdrawals may trigger liquidity concerns. Given these conflicting possibilities, the next few months will be critical in determining IndusInd Bank’s trajectory.

Lessons from RBL Bank and Yes Bank
CLSA draws parallels between IndusInd Bank's current situation and the experiences of RBL Bank in 2021 and Yes Bank in 2019. RBL faced a 60% stock price decline after a PSU banker was appointed CEO. However, as no major financial issues emerged, the stock eventually rebounded. Similarly, Yes Bank saw a short-term stock surge after it reported "nil gross non-performing loan (GNPA) divergence," though it later declined due to deeper financial troubles.

According to CLSA, IndusInd Bank's trajectory is more likely to resemble RBL Bank's case, where initial market fears led to a correction, but the stock eventually recovered as fundamentals took over.