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Rs.544
Target Price: Rs.800
Potential Upside: 47%
Absolute Rating: BUY
Banking
Karur Vysya Bank Ltd.
15th April 2015
Karur Vysya Bank Limited (KVB) was set up in 1916 Tamil Nadu. As on December 31, 2013, the bank’s staff strength is 7,220, with 588 branches and
1630 ATMs across India. Branches in the South region account for 80% of its network and 67% of total business. The bank has declared 100% dividend
since 2003-04. Since 2007-08, the dividend was 120% & 130% dividend was declared for 2013-14. Till date bank concluded 14 Rights issue and 7 Bonus
issues and KVB had been the first bank to get permission from RBI to issue bonus shares.
Consolidation in the Old Private Sector Banks(OPSB) will upgrade valuation multiple
The consolidation in OPSB continues since 1990s , recently Kotak Mahindra Bank announced acquisition of mid – sized lender ING Vysya Bank, which
was originally an old private sector bank (OPSB), known as Vysya Bank. Most of the OPSB banks are anywhere from 5 decades to 0ne century old.
However, gradually they are disappearing in the last 2 decades due to their acquisitions by the large banks. So far the large banks have acquired, apart
from this erstwhile Vysya Bank, Bank of Madura, Lord Krishna Bank and, Bank of Rajasthan in the OPSB space. Outside this OPSB segment, other midsized banks which have seen consolidation are: Centurion bank, Bank of Punjab, Bharat Overseas Bank, etc. In the process of these M&As, we have
seen the valuation multiple (Price to Adjusted Book value) of OPSBs going up from as low as 0.5x about 15 years ago to over 2x now. We expect this
consolidation process especially in the OPSB to continue and hence, believe that their valuation multiple would see further upgrades;
Impressive Q3FY2015 results
In Q3FY2015, Karur Vysya Bank (KVB) has apparently posted muted growth in net profits at just 6.5% yoy. However, actually its results are quite
impressive: KVB grew its net profits at 6.5% yoy to Rs.113.8 crore despite provisions for non-performing assets more than doubling yoy from
Rs.50.70 crore to Rs.106.20 crore in December 2014 quarter; Net interest income grew 28.2% to Rs.391 crore during the quarter compared to Rs.305
crore in same quarter last fiscal; Other income climbed 39.3% to Rs.147.14 crore during the same period; Non-performing assets (NPAs) marginally
increased - Gross NPAs increased 44 basis points yoy (up 55 bps qoq) to 1.91% and Net NPAs rose 25 basis points yoy (up 14 bps sequentially) to
0.73% in December quarter. However, it should be noted that KVB is one of a few mid-sized banks to maintain the Net NPA (Non-performing assets)
at less than 1%;
Branch expansion to increase business further
The bank has setup its 600th branch in Tamil Nadu. In the last 2 years, the management has become very aggressive in branch expansions – it set up
121 new branches in FY2013 and FY2014 – it is little more than half of total number of branches (231) it had 10 years ago (in FY2005) - we firmly
believe that the aggressive branch expansions of the bank in the last 2 years would play out positively on its bottom line over the next two years;
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Equinomics Research & Advisory Private Limited - Investment Adviser
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Stock Data
Market cap
: Rs 5,766 cr
52 week high/low
: Rs 618/ 363
Avg. daily vol. (6mth)
: 185,112
NSE code
: KARURVYSYA
BSE code
: KARURVYSYA
Shareholding (%)
Dec-14 Sep-14
Promoters
:
2.18
2.22
FIIs
:
28.34
28.47
DIIs
:
18.12
17.78
Others
:
51.36
51.53
Founder & Managing Director
Mr. G. Chokkalingam
chokka.g@equinomics.in
Investment Rationale Cont…
Comparative Valuation of Private Sector Banks
Banks
City Union Bank Ltd.
ING Vysya Bank Ltd.
Karur Vysya Bank Ltd.
South Indian Bank Ltd.
CMP
95
1031
544
25
Business
(Deposits +
Advances)
39909
84210
79980
82065
Net NPAs
(%)
1.31
0.66
0.73
1.04
Adj. Book
Value*
39
377
323
24
Price/ABV
(X)
2.4
2.7
1.6
1.0
*(net worth as of September 2014 adjusted for the latest net NPA outstanding)
ING Vysya Bank is a close peer to Karur Vysya Bank – both of them have business size of around Rs.80,000 crore (as of September 2014). At the current market price of Rs.1031,
ING Vysya Bank trades at 2.7x its Adjusted Book Value of Rs.377 as of December 2014, whereas KVB trades at 1.6x its Adjusted Book Value of Rs.323. Consequent to the latest consolidation in
the mid-sized banking space, we expect the valuation gap between KVB and ING Vysya to narrow down.
Outlook & Valuations
The stock has under-performed the other successful banking stocks like IndusInd Bank in the last 18 months mainly due to 21% yoy fall in net profits in FY2014. During the last 2 years,
unfortunately the domestic economy also slowed down significantly leading to peaking of NPAs for the entire banking sector including KVB. This has led 53% yoy jump in employee costs and
259% yoy increase in “provisions other than tax” in FY2014. The additional burden on these two accounts alone stood at Rs.503 crore in FY2014! Whereas its net profit fell only by Rs.120
crore yoy in FY2014. In next 2 to 3 years, its new branches will start turning around and the NPA cycle in the country would reverse. This period eventually end
with KVB celebrating its 100th year in FY2016. Hence, we expect Karur Vysya Bank playing out in a big way in FY2016. Recently KVB mobilized Rs.625 crore through QIP which is
close to 1/5th of its net owned funds. These additional resources would improve its lending base significantly in the near future. Hence, we initiate “Buy” recommendation on the stock for
target price of Rs. 800 for next 2-3 years.
Financial Summary
Net Interest Income (Rs Cr)
Change
(%)
PAT
(Rs Cr)
Change
(%)
ABV
(Rs)
Change
(%)
P/ABV
(x)
FY2013
1,158
26.3
550
9.7
278
13.2
1.9
FY2014
1,284
10.8
430
-21.9
297
7.1
1.8
FY2015E
1,541
20.0
558
30.0
313
5.2
1.7
FY2016E
1,973
28.1
791
41.8
383
22.6
1.4
Y/E Mar (Rs Cr)
Source: Company, Equinomics Research & Advisory Private Ltd
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Equinomics Research & Advisory Private Limited - Investment Adviser
Disclaimer
Stock Disclosure: Whether Stock Held By:
Karur Vysya Bank Ltd.
G.Chokkalingam & Family
Equinomics
YES
NO
Equinomics Research & Advisory Private Ltd - Investment Adviser (SEBI REG. NO. INA000001712)
G. Chokkalingam - Founder & Managing Director
Head Office – Mumbai . 18 - A/3, Ekta CHS, Shivdham Complex, Opposite Fire Brigade, Near Oberoi Mall, Malad (East), Mumbai - 400097
Ph: +91 22 28492942 | Email: chokka.g@equinomics.in
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Equinomics Research & Advisory Private Limited - Investment Adviser