DCF Analysis for IndusInd Bank: 2024–2030

 AUTHORS- DR SHALINI SINGH, ADITI ANAND

OVERVIEW

 

One of the top private-sector banks in India is IndusInd Bank, which was founded in 1994. The bank, which has its main office in Mumbai, has developed into a major force in the Indian financial industry by providing a variety of banking and financial services. These consist of wealth management, trade finance, investment banking, corporate banking, and personal banking services.

 

IndusInd Bank takes great satisfaction in using technology to provide exceptional customer service. With its cutting-edge goods and smooth banking solutions across numerous channels, it has made notable progress in digital transformation. The bank has maintained steady growth and profitability thanks to its strong emphasis on customer-centricity and excellent risk management framework.

 

IndusInd Bank's competitive Net Interest Margins (NIMs), robust capital adequacy ratio, and well-diversified loan portfolio are among its main advantages. With programs designed to promote small and medium-sized businesses (SMEs) and advance financial literacy, it has also shown a dedication to sustainability and equitable growth.

 

DCF Analysis for IndusInd Bank: 2024–2030

 

Comparing Intrinsic Value with Current Market Valuation

Based on anticipated Free Cash Flows (FCF) from 2024 to 2030, we used the Discounted Cash Flow (DCF) model to compare the company's intrinsic worth to its present market valuation. This method includes:

·         Free Cash Flow Forecasts : We calculated  free cash flow forecasts based on the given assumptions for reinvestment, depreciation, tax adjustments, and EBIT for year 2023 2024

 

 

 

 

 

Particulars	FY 2023-2024
REVENUE FROM OPERATION
Interest earned	45748.21
Net interest income	20615.92
Non Interest income	9395.77
Total Revenue	75759.9
(-) EXPENSES
Employee cost	5373.93
Others	8773.7
Total Operating Expenses	14147.63
EBDIT	61612.27
(-) depreciation	4246
Profit before provisions/EBIT	57366.27
(-) interest	25132.29
PBT	32233.98
(-) tax	3172
PAT	29061.98

 

·         Overall cost of Capital : Based on borrowing rates and market risks, the weighted cost of debt and equity is reflected in the discount rate, or WACC.

 

CALCULATION OF WACC
COST OF EQUITY	COST OF DEBT
0.096	0.055
WEIGHT OF EQUITY	WEIGHT OF DEBT
7783200	476114113
WACC	2693.346342
WACC	27%

 

·         Growth rate : In order to predict sustainable cash flows after 2030, the terminal growth rate is used.

 

CALCULATION OF FREE CASH FLOW
EBIT	57366.27
(1-TAX)	0.89
NOPAT	64456.48
DEPRECIATION	4246
TOTAL	68702.48
(-) CAPITAL EXPENDITURE	-4785
(Increase) in Advances	-5662
(Increase) in Investments	-2425
(Increase) / Decrease in Other Assets	3302
FCFF	63917.48
GROWTH RATE
6.40%

 

CALCULATION OF TAX RATE
TAX RATE	10.91460389

 

·         Based on anticipated Free Cash Flows (FCF) from 2024 to 2030, we used the Discounted Cash Flow (DCF) model to compare the company's intrinsic worth to its present market valuation.

DCF APPROACH
YEAR	CASH FLOW	PVF	DCF
2024	63917.48		0.064
2025	68008.19872	0.9091	61826.25346
2026	72360.72344	0.8264	59798.90185
2027	76991.80974	0.7513	57843.94666
2028	81919.28556	0.683	55950.87204
2029	87162.11984	0.6209	54118.96021
2030	92740.49551	0.5645	52352.00971
2030	450196.5801	0.5645	254135.9695
TERMINAL VALUE			450196.5801
VALUE OF FIRM			596026.9134

 

 

Key Findings:

·         Intrinsic Value Per Share: The calculated figure suggests that the company may be undervalued because its intrinsic value is more than its current market price.

·         Growth Trends: Consistent profitability through 2030 is indicated by robust cash flow growth and revenue diversification.

·         Market Risks: Vulnerabilities to changes in interest rates, regulations, and

macroeconomic conditions are shown by sensitivity analysis.

 

 

 

 

Data-Driven Insights:
Component	Value (in ₹ Crore)	Explanation
EBIT	57,366.27	Indicates strong operational efficiency.
Depreciation	4,246.00	Enhances cash flow without cash expense.
Tax Adjustment Factor (1-T)	0.89	Reflects favorable tax environment.
NOPAT	64,456.48	Post-tax operational profitability.
Free Cash Flow (FCF)	Projected Growth	Drives intrinsic valuation and strategy.

 

Business Valuation Outcomes:
Metric	Value	Explanation
Intrinsic Value Per Share	Higher than Market	Reflects potential undervaluation.
Terminal Growth Rate	Sustained	Accounts for long-term stability.
WACC	Moderate	Balances equity and debt costs.

 

Prospective Growth Patterns, Financial Gains, and Hazards

Ø  Trends in Growth:

·         Steady expansion is supported by diversification of revenue sources, such as interest income and fee-based revenues.

·         Investing in digital banking and technology improves client engagement and operational efficiency.

Ø  Profitability

·         Strong bottom-line performance is ensured by robust cost-to-income ratios and net interest margins (NIMs).

·         The bank's operational effectiveness and market positioning are highlighted by the anticipated growth in EBIT and FCF.

Ø  Market Risk:

·         Interest rate changes may have an effect on lending and borrowing spreads.

·         Regulatory changes, especially those pertaining to capital adequacy and provisioning standards.

·         macroeconomic factors influencing loan performance, such as inflation and exchange rate swings.

 

Free cash flow's function in business valuation

One important measure of a company's capacity to make extra money after paying for capital and operating expenses is free cash flow. In the DCF method:

ü  FCF Emphasises Operational Health: Indicates the company's fundamental profitability and effectiveness.

ü  A positive free cash flow (FCF) indicates the possibility of debt repayment, dividend payments, and reinvestment.

ü  The foundation for forecasting future growth and determining the terminal value is the driver of intrinsic value.

 

Recommendation for Financial Planning

A thorough financial plan is suggested based on the valuation study and calculated free cash flow:

Short-Term Goals (2024–2026):

·        Boost the quality of your assets:

ü Reduce non-performing assets (NPAs) via improving risk management systems.

ü To reduce credit risk, concentrate on secured financing.

·         Optimise the ratio of cost to income:

ü  To increase productivity, spend money on technology.

ü  Simplify operational procedures to cut costs.

·         Increase the Adequacy of Capital:

ü  To facilitate future expansion, keep regulatory capital buffers intact.

ü  Examine strategic investments or equity infusions.

 

Long-Term Goal (2027–2030):

·         Sustainable Growth:

ü  To increase your clientele, venture into untapped markets.

ü  Utilise cutting-edge financial tools to diversify your sources of income.

·         Boost Market Position and Brand Strength:

ü  In order to enhance the client experience, concentrate on digital transformation.

ü  Use analytics to find chances for cross-selling and targeted marketing.

·         Continue to Be Financially Resilient:

ü  Make plans for future economic downturns.

ü  Review asset-liability management plans on a regular basis.

·         Allocation of Resources:

ü  Make technological investments a top priority (e.g., mobile banking platforms, AI for risk assessment).

ü  Set aside money for advertising initiatives and client acquisition.

ü  In order to protect against credit risks, increase NPA provisioning.

 

Techniques for Risk Management:

·         Analysis of Interest Rate Sensitivity

ü  Develope hedging strategies to guard against changes in exchange rates.

·         Adherence to Regulations:

ü  Implement robust systems to keep an eye on and adjust to changes in regulations.

·         Planning for an Economic Downturn:

ü  Maintaining liquidity buffers will increase the resilience of the balance sheet.

Financial forecasting for growth:

·        Revenue Growth: Fee-based services and digital transformation are driving a 10–12% CAGR.

·        Maintain net interest margin at 4% or above.

·        Reduce the cost-to-income ratio to less than 50% via increasing efficiency.

 

 

CONCLUSION

 

The financial forecast for IndusInd Bank shows great potential for long-term growth, propelled by a variety of revenue sources, high free cash flow creation, and well-timed technological investments. A promising investment opportunity is indicated by the DCF analysis, which shows that the current market price is undervalued in relation to intrinsic value.

While long-term objectives must concentrate on market expansion and resilience to economic volatility, short-term financial goals should prioritise enhancing asset quality and optimising cost efficiencies. Sustaining profitability and optimising shareholder value will need careful financial forecasting and efficient risk management. IndusInd Bank is in a strong position to take advantage of growth prospects while reducing market risks by utilising data-driven insights and following the financial plan as laid forth.