'Barring a dead cat bounce': What Emkay says on IndusInd Bank share, once its top pick for 2025

Emkay Global said it is finding it embarrassing that IndusInd Bank is in its model portfolio and that a top pick for 2025. The domestic brokerage said it too late to sell the stock and believes that barring a near-term dead-cat bounce, the stock will mark time until the new CEO is announced.

IndusInd Bank has been in news after the private lender declared a preliminary impact of 2.4 per cent of its net worth due to a change in the valuation of derivatives transactions, leading to a flurry of downgrades on the stock. This came just after the RBI gave one-year extension to its prevailing CEO, denying him a three-year extension as sought.

Emkay Global said stock valuations at 0.8 times estimated FY26 book value have over-discounted the derivatives loss, but that is natural when credibility is an issue.

"IIB is, embarrassingly, in our model portfolio and a top pick for CY25. The derivatives loss, though a one-off, is a setback to management credibility. The transactions should not have been treated as two-legged, when one is purely internal. Applying different standards to each leg made it even worse and the bank was, effectively, overstating NII for an extended period," Emkay Global said.

Despite the management’s protestations, Emkay Global said the disclosure could have been made sooner.

"The silver lining is that the business outlook is improving. The MFI stress should be over by 1QFY26; the bank is well-positioned to exploit any recovery in the autos segment (25.5 per cent of loan book); a low-floating rate exposure makes it a beneficiary of falling rates," it said.

Emkay Global said that the promoters and board now have an opportunity to address investor skepticism with a statement hire when choosing Sumant Kathpalia’s successor. "We are keeping the stock in the EMP (too late to sell) though we are cognizant that, barring a near-term dead-cat bounce, the stock will mark time until the new CEO is announced," it said.

Elara Securities earlier noted that the accounting discrepancy leads to uncertainty in the context of lower-than-expected tenure extension of MD & CEO Sumant Kathpalia and the exit of CFO Gobind Jain earlier. While the timing of this event is strange, coming on the heels of the lower tenure extension, there is a lot left unanswered. it said.

It questioned why was this not highlighted earlier, how is such a lapse possible despite concurrent audits, why did the auditors not share any qualifications and are there any additional challenges. Besides, the brokerage asked how did this issue go undetected for more than five years. This poses a series of questions on lapses in terms of processes and sanctity of book value, it said.

"The past year has been challenging for IIB. The outcomes have been less than desired and marred by event risks. This was reflected in price movement with more than 30 per cent correction in the past six months. We have yet to prune our earnings estimates, but this event does create challenges around potential downside revision. Given the uncertainty, we downgrade IIB to 'Sell' from 'Accumulate' with a lower target of Rs 830 from Rs 1,020 based on 0.8x (from 1.0x) FY27E P/BV," it said.