Karur Vysya Bank: Inexpensive Valuation

India Infoline News Service | Mumbai |

Karur Vysya Bank’s credit portfolio is broadly spread across Corporate (37.6% of the total advances), Commercial (32.3%), Agriculture (18.3%) and Retail (11.9%) segments.

CMP Rs436, Target Rs509, Upside 16.7% 
 

We recently spoke to the management of Karur Vysya Bank (KVB) to discuss in detail its FY13 performance and strategy going forward. Following are the key takeaways from our interaction:


Shift in portfolio mix: Portfolio mix is gradually shifting towards Retail and Commercial segment given bank’s increasing preference towards better quality secured lending.


Loan growth: Management has guided 25% loan growth in FY14; we have been slightly conservative assuming 22% growth on the back of weakening corporate loan demand and growth moderation in Jewellery loans.


Asset quality: Delinquency ratio remained stable at 0.8% in FY13. However, robust recoveries resulted in material improvement in GNPA ratio from 1.3% in FY12 to 1% in FY13. We have factored a higher GNPA ratio in FY14-15 given KVB’s material exposure to Jewellery loans (26.3%); further gold price correction may impact asset quality here despite bank’s conservative lending practice. Expect credit cost to rise marginally.


NIM: Management has guided stable 3% NIM in FY14. Shift towards better quality assets and high dependence on Retail TDs (rates have been stubborn) limit scope of margin improvement in the current year. In FY15 though NIM is expected to expand marginally with CASA improvement and downward re-pricing of retail deposits.


Opex: As per management, C/I ratio is likely to improve in FY14. In our view, incremental cost of young branches and opex on new branches will keep the ratio elevated in FY14 also.


Return ratios: Elevated Cost/Income ratio and slightly higher credit cost would suppress RoA in FY14. However, overall profitability would bounce back in FY15 due to improvement in NIM and C/I ratio.


Valuation: We believe current valuation of 1.35x 1-year rolling P/adj.BV is inexpensive, limiting downside from present level for long term investors. Attractive valuation and relatively resilient performance outlook makes KVB a BUY. Our 9-month target is Rs509.


Financial summary
Y/e 31 Mar (Rs m)
FY12
FY13
FY14E
FY15E
Total operating income
12,673
16,110
19,508
24,313
Yoy growth (%)
22.9
27.1
21.1
24.6
Operating profit (pre-provisions)
7,257
8,488
10,133
13,063
Net profit
5,017
5,503
6,091
7,916
yoy growth (%)
20.7
9.7
10.7
30.0





EPS (Rs)
46.8
51.3
56.8
73.9
Adj. BVPS (Rs)
245.3
277.7
308.8
350.9
P/E (x)
9.3
8.5
7.7
5.9
P/Adj.BV (x)
1.8
1.6
1.4
1.2
ROE (%)
20.8
19.0
18.5
20.9
ROA (%)
1.5
1.3
1.2
1.3
CAR (%)
14.3
14.4
13.3
12.3
Source: Company, India Infoline Research



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