Buy Karur Vysya Bank - TP Rs.512 - Dolat Capital

Core interest income and operating profit in-line with our estimates. Write-back of investment depreciation provision aided bottom-line. Asset quality deteriorated with rise in GNPA, though adequate NPA provision was made. We maintain our positive stance on the stock.

In Q1 FY13, Karur Vysya Bank's (KVB) net interest income (NII) grew by 23.9% YoY to Rs 2.5bn - 0.5% lesser than our estimates of Rs. 2.6bn. KVB's margin declined to 2.82% as against 3.04% in Q4 FY12 and 3.18% in Q1 FY12. Higher increase in cost of deposits (30bps QoQ) and 6bps QoQ decline in yield on advances led to decline in margin.

During this quarter, other income grew by 40.5% YoY to Rs. 1.0bn from Rs 0.7bn in Q1 FY12 (ahead of our expectations of Rs. 0.9bn). The non-fund income growth mainly led by robust fee income and jump in forex gains & treasury income aided operating profit. KVB's operating profit grew 22.6% YoY to Rs. 2.0bn in-line with our estimates.

Write back of investment depreciation provision Rs. 430mn off-setted higher NPA provisioning of Rs. 328mn and thereby aided bottom-line growth. Net profit grew 25.1% YoY to Rs. 1.5bn as against our and consensus estimates of Rs. 1.4bn. On asset quality front, gross NPA increase by 37% YoY and 17.4% QoQ to Rs. 3.8bn; a key negative surprise in this quarter. The bank's asset quality deteriorated with GNPA ratio increasing to 1.53% compared to 1.33% as on end-Mar'12 and net NPA ratio to 0.38% from 0.33% in Q4 FY12. However, PCR remains stable at 75.5% in Q1 FY13. During the quarter, the bank restructured Rs. 500mn, loan amounting to Rs. 297mn was closed, Rs. 209mn loan amount was recovered and Rs. 70mn slipped into NPA. Hence, the total outstanding restructured loan book at the end of Q1 FY13 slightly decline to Rs. 6.5bn from Rs. 6.6bn in Q4 FY12.

In FY12-14, the bank would report RoAA and RoAE in a range of 1.2%-1.3% and around 18-20% respectively. We maintain our FY13 & FY14 earnings estimates and target price to Rs. 512. We reiterate our stock rating to Buy. At current price, it quotes at 1.5x and 1.3x ABV FY13 and FY14 respectively; based on our target price, the stock would trade at 1.6x adjusted book value FY14.

Robust business growth: KVB's total business grew 32% YoY to Rs. 576bn. Deposits and net advances grew 31% and 33% to Rs. 330bn and Rs. 246bn respectively. Creditdeposit ratio rose to 74.7% from 73.6% in Q1 FY12, however, remained stable from Q4 FY12 levels. On the deposit side, CASA share declined to 18% as against 19.2% in Q4 FY12 and 22.6% in Q1 FY12.

The bank's tremendous efforts and focused approach on volume growth have led to business growth of 30-35% (higher than the industry average) in the past couple of quarters. For FY12-14, we expect KVB's total business to grow 28.1% CAGR. We assume deposit and credit books to expand 27.9% and 28.3% respectively over the corresponding period.

Higher liabilities costs led to decline in margin: KVB reported 22bps QoQ and 36bps YoY decline in margins to 2.82% as against 3.04% in Q4 FY12 and 3.18% in Q1 FY12. Higher increase in cost of deposits (30bps QoQ) and 6bps QoQ decline in yield on advances led to decline in margin. Going forward, it is expected that moderate growth in deposits and increase in credit-deposit ratio would protect higher erosion in margin. We estimate margins to drift down by 26 bps to 2.62% in FY13.

Robust non-fund income aided profitability: During this quarter, other income grew by 40.5% YoY to Rs. 1.0bn from Rs. 0.7bn in Q1 FY12 (ahead of our expectations of Rs. 0.9bn). The non-fund income growth was mainly led by robust growth of 20.4% in core fee income to Rs. 606mn as against Rs. 504mn in Q1 FY12, 3.6x jump in forex gains to Rs. 148mn as against Rs. 41mn in Q1 FY12 and multifold jump in treasury income to Rs. 139mn as against Rs. 26mn in Q1 FY12. Much higher other income aided operating profit; it grew 22.6% YoY to Rs. 2.0bn in-line with our estimates.

Slight strain on asset quality: On asset quality front, gross NPA increase by 37% YoY and 17.4% QoQ to Rs. 3.8bn; a key negative surprise in this quarter. The bank's asset quality deteriorated with GNPA ratio increasing to 1.53% compared to 1.33% as on end-Mar'12 and NNPA ratio to 0.38% from 0.33% in Q4 FY12. However, PCR remains stable at 75.5% in Q1 FY13.

During the quarter, the bank restructured Rs. 500mn, loan amounting to Rs. 297mn was closed, Rs. 209mn loan amount was recovered and Rs. 70mn slipped into NPA. Hence, the total outstanding restructured loan book at the end of Q1 FY13 slightly decline to Rs. 6.5bn from Rs. 6.6bn in Q4 FY12. KVB's gross slippage ratio increased to 1.4% from 0.83% in Q4 FY12. On gross NPA front, we factor decrease in GNPA to 1.24% in March-2013 from 1.33% in March-2012. On loan-restructuring front, we expect restructured loan book to increase to Rs. 7.5bn on end March-13 from Rs. 6.6bn as on end March-12.

Valuation

In FY12-14, the bank would report RoAA and RoAE in a range of 1.2%-1.3% and around 18-20% respectively. We maintain our FY13 & FY14 earnings estimates and target price to Rs. 512. We reiterate our stock rating to Buy. At current price, it quotes at 1.5x and 1.3x ABV FY13 and FY14 respectively; based on our target price, the stock would trade at 1.6x adjusted book value FY14.

Source : Equity Bulls

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