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FIRST LIGHT 02 March 2020

RESEARCH TOP PICKS

BOB Economics Research | Q3FY20 GDP LARGE-CAP IDEAS

Growth to recover in FY21 Company Rating Target

IndusInd Bank | Target: Rs 1,700 | +52% | BUY Bajaj Finance Buy 5,200

Leadership overhang recedes Cipla Buy 570

Eicher Motors Buy 25,000

Petronet LNG Buy 400

SUMMARY Reliance Industries Buy 1,860

India Economics: Q3FY20 GDP

MID-CAP IDEAS
India’s GDP and GVA growth moderated to 4.7% and 4.5% in Q3FY20 from Company Rating Target
a revised growth of 5.1% and 4.9% in Q2. Investment spending has led the dip Alkem Labs Buy 2,870
at (-) 5.2%. Private consumption held up. On the supply side, electricity Greenply Industries Buy 205
output declined the most on account of manufacturing slowdown. Growth is
Laurus Labs Buy 510
likely to recover to 5.5% and 6.2% in FY21 and FY22 respectively on the back
Transport Corp Buy 355
of recovery in rural demand and disinvestment led government capex. The
Ashok Leyland Sell 64
recent COVID-19 outbreak remains a significant downside risk in Q4FY20.
Source: BOBCAPS Research
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DAILY MACRO INDICATORS

IndusInd Bank Indicator Current
2D 1M 12M
(%) (%) (%)
US 10Y
As per a press release on the exchanges, IndusInd Bank (IIB) has received RBI yield (%)
1.26 (8bps) (35bps) (145bps)

approval to appoint Sumant Kathpalia as MD & CEO for three years beginning India 10Y
6.38 3bps (18bps) (103bps)
yield (%)
24 March. At 1.5x FY22E P/BV, IIB's stock is trading at three-year lows and USD/INR 71.57 0.1 (0.2) (1.2)
has corrected ~25% over the last one year on concerns surrounding asset Brent Crude
52.18 (2.3) (12.0) (21.0)
(US$/bbl)
quality and management transition. This appointment assuages one of the key
Dow 25,767 (4.4) (9.7) (0.6)
investor concerns.
Shanghai 2,991 0.1 0.5 1.7

Click here for the full report. Sensex 39,746 (0.4) (3.4) 10.8

India FII
26 Feb MTD CYTD FYTD
(US$ mn)

FII-D (309.1) 586.5 (982.4) 2,279.2

FII-E (436.7) 1,305.1 2,677.7 10,503.6

Source: Bank of Baroda Economics Research

BOBCAPS Research
research@bobcaps.in

BOB Capital Markets Ltd is a wholly owned subsidiary of Bank of Baroda

Important disclosures, including any required research certifications, are provided at the end of this report.
INDIA ECONOMICS

Q3FY20 GDP 28 February 2020

Growth to recover in FY21

India’s GDP and GVA growth moderated to 4.7% and 4.5% in Q3FY20 from Sameer Narang
a revised growth of 5.1% and 4.9% in Q2. Investment spending has led the dip Dipanwita Mazumdar | Aditi Gupta
chief.economist@bankofbaroda.com
at (-) 5.2%. Private consumption held up. On the supply side, electricity
output declined the most on account of manufacturing slowdown. Growth is
likely to recover to 5.5% and 6.2% in FY21 and FY22 respectively on the back
of recovery in rural demand and disinvestment led government capex. The
recent COVID-19 outbreak remains a significant downside risk in Q4FY20.

GVA growth moderates: India’s Q3FY20 GVA growth slowed down to 4.5%
from 4.8% in Q2FY20 led by slowdown in electricity, gas and water supply (-
0.7% in Q3 vs 3.9% in Q2) and construction (0.3% versus 2.9% in Q2).
Manufacturing growth was muted at (-) 0.2% in Q3 versus (-) 0.4% in Q2).
However, growth in agriculture (3.5% in Q3 versus 3.1% in Q2) and services
sector (7.4% in Q3 versus 7.3% in Q2) held up. In services, improvement was
seen in financial, real estate and professional services (7.3% in Q3 versus 7.1%
in Q2) and trade, hotels & communication services (5.9% in Q3 versus 5.8% in
Q2). Outlook for agriculture is relatively well placed with improved Rabi sowing.

Investment spending falters: GDP growth fell to 4.7% in Q3FY20 from 5.1%
in Q2FY20 (revised upwards by 60bps). This was led by a sharp contraction in
investment spending growth to the lowest in the current series at (-) 5.2% in
Q3 versus (-) 4.1% in Q2. Exports also contracted at the fastest pace in 16-
quarters by (-) 5.5% compared with (-) 2.1% in Q2. Government spending too
slowed to 11.8% in Q3 from 13.2% in Q2. On the positive side, private
consumption picked up to 5.9% in Q3 versus 5.3% in H1FY20.

GVA/GDP growth forecasts retained: Both GVA and GDP growth

projections for FY20 were unchanged at 4.9% and 5% respectively. Only
projections for agriculture and mining have been revised upward to 3.7% (2.8%
1st A.E.) and 2.8% (1.5% 1st A.E.) respectively. However, projections for
manufacturing and electricity, gas, water supply and other utility services have
been revised downward to 0.9% (2% 1st A.E.) & 4.6% (5.4% 1st A.E.).
Investment demand is also set to decline by (-) 0.6% versus an increase of 1%
earlier. We expect GDP growth to bottom out in FY20, before seeing a revival
to 5.5% in FY21 and 6.2% in FY22, on the back of government divestment led
spending and rural recovery.

ECONOMICS RESEARCH
FLASH NOTE

BUY
TP: Rs 1,700 |  52% INDUSIND BANK | Banking | 28 February 2020

Leadership overhang recedes

RBI approves new MD & CEO: As per a press release on the exchanges, Vikesh Mehta
IndusInd Bank (IIB) has received RBI approval to appoint Sumant Kathpalia as research@bobcaps.in

MD & CEO for three years beginning 24 March. At 1.5x FY22E P/BV, IIB’s
stock is trading at three-year lows and has corrected ~25% over the last one
year on concerns surrounding asset quality and management transition. This
appointment assuages one of the key investor concerns.

Promoting an internal candidate a positive move: Kathpalia is a chartered

accountant and currently heads IIB’s consumer banking business. He was part
Ticker/Price IIB IN/Rs 1,116
of the ABN Amro team that joined IIB when Romesh Sobti took the helm in
Market cap US$ 9.4bn
2008. We believe the appointment of an internal candidate is a sensible move Shares o/s 603mn
– not only is Kathpalia credited with building the bank’s consumer loan portfolio 3M ADV US$ 98.9mn
from scratch, but his elevation from within could mean no drastic changes in 52wk high/low Rs 1,834/Rs 1,101
IIB’s existing strategies, especially regarding retail. The bank’s consumer finance Promoter/FPI/DII 17%/52%/31%
Source: NSE
portfolio is well diversified and currently forms ~54% of the loan book.

Concerns over asset quality to stay: The leadership change comes at a time KEY FINANCIALS
Y/E 31 Mar FY20E FY21E FY22E
when asset quality is taking a toll on IIB. Slippages from the retail and corporate
Net interest income 121,131 141,941 177,991
portfolios (even outside of stressed groups) have increased. Uncertainty NII growth (%) 36.9 17.2 25.4
persists over when these slippages will peak given that the SMA book remains Adj. net profit (Rs mn) 54,079 69,042 89,751
sticky at ~1% of advances. Also, material exposure to troubled telecom player EPS (Rs) 82.5 97.5 126.8

Vodafone Idea remains an overhang. P/E (x) 13.5 11.4 8.8

P/BV (x) 2.2 1.8 1.5

Over the last few quarters, IIB has raised coverage on its Rs 30bn IL&FS ROA (%) 1.7 1.7 1.8
ROE (%) 17.2 17.2 18.7
exposure to 73% while its exposure to potential stressed groups is down to
Source: Company, BOBCAPS Research
0.5% (1.9% in Q4FY19). Nonetheless, we believe concerns over asset quality
are likely to stay, posing a key challenge for the new management. STOCK PERFORMANCE

Maintain BUY: We remain positive on the stock as it is trading at 1.5x FY22E (Rs) IIB
2,050
P/BV which is cheap for a bank with an expected ROA/ROE profile of 1,850
1.8%/19% by FY22. 1,650
1,450
1,250
1,050
Aug-19
Aug-17

Aug-18
Feb-17

Feb-18

Feb-19

Feb-20
May-17

May-18

May-19
Nov-18

Nov-19
Nov-17

Source: NSE

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EQUITY RESEARCH
FIRST LIGHT

Disclaimer

Recommendations and Absolute returns (%) over 12 months

BUY – Expected return >+15%

ADD – Expected return from >+5% to +15%

REDUCE – Expected return from -5% to +5%

SELL – Expected return <-5%

Note: Recommendation structure changed with effect from 1 January 2018 (Hold rating discontinued and replaced by Add / Reduce)

Rating distribution

As of 29 February 2020, out of 85 rated stocks in the BOB Capital Markets Limited (BOBCAPS) coverage universe, 50 have BUY ratings, 17 are rated ADD, 9 are
rated REDUCE and 9 are rated SELL. None of these companies have been investment banking clients in the last 12 months.

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EQUITY RESEARCH 02 March 2020

FIRST LIGHT

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EQUITY RESEARCH 02 March 2020