Buy Karur Vysya Bank - Motilal Oswal

We recommend to BUY Karur Vyasa Bank (KVB) with a 12month price target of Rs.725 , valuing it at 2.25x P/ABV multiple on FY14 estimated book.

Reasonable Presence:

Karur Vyasa Bank (KVB) is a 96 years old private bank headquartered at Karur, Tamil Nadu with a network of 514 branches and 1400 ATMs with business size of Rs.58,000crs. Tamil Nadu/AP/Maharashtra has 45%/17%/13% of its branch network. KVB's 58% of the branches are located in rural and semi-urban areas. Corporate advances/Commercial/Agriculture contribute 42%/ 34%/15% of total loan book.

Robust business growth:

KVB's loan book grew at 35% during FY12. KVB's deposit and loan book grew at CAGR of 28% during the last 5 years ending FY12 v/s 18% and 19% respectively for the industry. We expect the bank to deliver NII & PAT CAGR of 22% and 19% respectively during FY12-14. Business growth is likely to remain strong for KVB as management has guided for increasing branches to 700 from 514 by FY16. Asset quality is very good with restructured loans and net NPA as % to loan book standing at 2.7% and 0.33% respectively.

Future Plans to aid profitable growth:

KVB has drawn up a road map to increase its business 2x from Rs.58000Cr currently to Rs.125000Cr in FY16 by focussing on (a) Significant Improvement in CASA ratio (b) Thrust on management of stressed portfolio along with recovery of NPAs (c) Improvement in fee based income by launching new products (d) Increase pan India branch presence.

Valuation and View

KVB trades at 2x/1.7x FY13E/14E P/ABV, which is at discount of ~ 10% to other listed in Private Banks (ex-Hdfc Bank). KVB has consistently maintained payout of ~30% , which results in dividend yield of ~3%, which is the highest amongst all private sector banks. We believe, discount to Private Banks will vanish owing to a very consistent performance, high dividend yield and better than industry growth rates. New capital raising seems to be away by more than 18 months. We recommend BUY with 12 month target price of Rs.725 (P/ABV 2.25x FY14E, P/E 11x FY14E).

Source : Equity Bulls

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