It’s the second-most expensive bank stock in the country after Kotak Mahindra and it is so for a reason. In 2008, when Romesh Sobti took over at the helm of IndusInd Bank, it was lower in the pecking order. A weak balance sheet and poor operations meant the bank was never considered a serious contender, but all that changed in the subsequent eight years as Sobti steered the bank through a comprehensive turnaround. During his tenure, the stock price has gone up nearly 14-fold from 80 a share to about 1,200. Not surprising the bank is now quoting at 32x one-year forward earnings and 4.10x book value.
The rich valuation is also driven by the fact that the bank continues to do well. Earnings grew 27% last year, and analysts are upbeat about the bank’s growth prospects with 42 of the 48 analysts tracking the stock having a 'buy' or a 'outperform' rating against six analysts who have a 'sell' rating. In Q1FY17, the bank reported a 26% growth in net profit led by a 30% growth in the loan book. Gross bad loans stayed flat at 0.9%. Commenting on the result, Motilal Oswal Securities mentioned in its report that the bank’s earnings are likely to grow 24% annually over the next three years. The brokerage has a target price of 1,300 for the stock.
This month, the stock hit its lifetime high of 1,255 and this also happens to be the period where Sobti, the managing director and CEO, sold close to 77,709 shares, netting 9.5 crore. Interestingly, MOSL's mutual fund arm, too, trimmed its position in the stock in August, selling close to 3 lakh shares of its total holding of 34 lakh shares.
Post the stake sale, Sobti now holds 122.291 shares or 0.02% of the issued capital. The stake is worth a little over 14 crore. But obviously the holding does not represent the stock options that are vested with the honcho. Prior to the stake sale, in May, Sobti had sold 50,944 shares. After which he was allotted 200,000 shares under ESOP in August 2016. In fact, Sobti has been cashing on the ride over the past two years. In 2014, he sold about 145,000 shares in a market for around 8 crore as the stock gained 91%. In 2015, when the stock gained 21%, he sold 20,000 shares.
Historically, on five occasions over the past decade, the stock after nearing its peak valuation of 3.3x one-year forward book value, has taken a breather and headed south. Will history repeat itself?