Buy Karur Vysya Bank - Cholamandalam Securities

Sturdy business growth

Regional advantages augur well for business growth

Karur Vysya Bank is well on course to achieve its business target of INR 1,250bn by March 2016 (a growth of 22% CAGR over FY12-16). Buoyed by regional advantages and on the back of its historical growth of 28% CAGR over FY07-12, we estimate KVB's loan book growth at ~24% CAGR over FY12-14. Though the RBI has pegged credit growth at 17% for FY13, out-performance over industry and marginal share in the industry lends confidence to the growth estimates.

Business growth to drive bottom-line

Net Interest Margins (NIMs) are likely to stay sticky, albeit lower at 2.9%. Moderation of interest rates, slowing credit growth and less than comfortable liquidity environment in the system are amongst the key dampeners. Our estimates are a notch lower than the bank's outlook of 3% for FY13. Higher cost of funds is likely to compress margins. Net interest income (NII) is expected to register a 24% CAGR growth over FY12-14, on the back of a healthy strong credit growth and flat margins. Other income is expected to chip in to contribute to topline growth of 24% CAGR. PAT is expected to grow at a slower pace on the back higher tax rates.

Comfortable capital ratios; healthy asset quality

KVB has set a reasonable business target of INR 1,250bn by March 2016 (a 22% CAGR over FY12-16). The bank enjoys a return on equity of ~20% and with a high retention ratio of 60%+ and with current capital ratios (bulk of its total capital coming from Tier -1 capital) at comfortable levels the bank is well poised to meet its capital fund requirements in the next couple of years though internal accruals. The bank has a relatively diverse loan book exposure on the industry front. Exposure to stressed sectors is low; with the exception of textiles and the power sector that constitute 7.5% and 7% of loan book respectively. About 90% of the power sector exposure is to state controlled entities both at the distribution and generation level. Although repayments may be delayed; recovery is expected to be better as compared to loans to power sector entities in the private sector.

Valuation

The stock trades at 1.2X FY14 P/Adj BV and 5.9X P/E FY14. Asset quality concerns in the banking sector largely overshadowed earnings growth led to a correction in valuation multiples. Backed by traction in business growth and steady NIMs, we expect earnings growth to continue. We value the stock at INR 473 per share, implying a FY13 P/Adj B of 1.7X and FY14 P/Adj BV of 1.4X. We rate the stock a BUY.

Risks

A further degradation of the environment in textiles and power sector would hamper asset quality and earnings. With NII contributing to bulk of topline a dip in margins and / or a slowdown in credit growth would be a negative.

Source : Equity Bulls

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