LIC’s favourite PSB stock rallied over 200% in 1 year; what’s next?

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The Indian banking sector has been facing challenges due to the disruptions brought by the Covid-19 pandemic but investors have shown confidence in public sector banks.

Data available with Ace Equity showed that all the state-owned banks have delivered a positive return to investors during the past one year. With a rally of over 200%, Indian Bank has emerged as the top gainer in the overall banking sector. Shares of the lender have jumped to Rs 142.55 on June 2, 2021 from around Rs 46 in the same month last year. HDFC Asset Management and Life Insurance Corporation of India held over 1% stake in the bank as of March 31.

Latest update

The bank posted a net profit of Rs 1,709 crore in the fourth quarter ended March 2021 as against a net loss of Rs 217.73 crore in the same quarter last year. This was the first year of operation for the amalgamated entity after Allahabad Bank merged with Indian Bank on April 1, 2020. Therefore, the figures are not comparable.

“Lower credit cost and a DTA (deferred tax asset) reversal led to strong earnings growth for Indian bank, with Q4 RoA at 1.1%. Asset quality surprised positively with reported FY21 non-performing assets (NPA) ratios being lower than in FY20,” Anand Rathi Shares and Stock Brokers said.

The board also recommended a dividend of Rs 2 per equity share for the financial year 2020-21.

Should you buy?

Brokerage Phillip Capital is positive on Indian Bank with a target price of Rs 180. “Having completed the merger, the next challenge for the bank is Covid related asset quality headwinds, akin to other banks. The guidance suggests credit cost of less than 2% and slippage of less than 3% in FY22. We expect re-bound in earnings growth for FY22/23, translating into return on assets of 0.6%/0.85%,” the brokerage said.

Anand Rathi also has ‘Buy’ call on Indian Bank with June 2022 target price of Rs 170. The brokerage said that given the bank’s healthy capitalisation and a favourable credit-deposit ratio, Indian Bank has adequate resources to rapidly gain market share from its peer banks.