Downgrade Karur Vysya Bank to HOLD - Best in Class, but Positives Priced-in - Karvy

Karur Vysya Bank (KVB) is currently trading at 30% premium to its five year average valuation, while the stock has outperformed the Bankex by 6% over last one year reflecting strong growth prospects, better margin and superior asset quality.

Healthy Growth in Business: The business growth of Karur Vysya Bank continues to remain above industry growth rate. The Bank's loan book grew 34% in FY12, while the overall banking industry grew by 18%. We expect the Bank to continue its high growth momentum in FY12-15E as well. The key segments likely to contribute the credit growth of Karur Vysya Bank are: SME, Agricultural & Personal loans.

NIMs - Expected to Remain Stable: We believe that Karur Vysya Bank's NIMs to remain stable in FY13E. Meanwhile, the decline in yield on advances in H2FY13E is expected to get offset by decline in cost of funds.

Impeccable Asset Quality: Karur Vysya Bank's asset quality continues to show improvement with it Gross NPA declining to its lowest level in last three years. We believe that the Bank's slippages would marginally increase, going forward, as it will be difficult for the Bank to improve the asset quality further. The Bank is currently having a healthy provision coverage ratio of 75% with restructured asset at one of the lowest level amongst its peers at 2.8%.

Outlook & Valuation

At CMP, the stock trades at 7.7x & 6.3x FY14E & FY15E earnings, and at 1.6x & 1.4x P/ABV FY14E & FY15E, respectively. Based on 20% premium to its mean valuation implying 1.5x P/ABV FY15E, We downgrade our recommendation on Karur Vysya Bank to "HOLD" from "BUY" given the recent run-up in the stock price, with upwardly revised target price of Rs. 610 per share (from Rs. 535 earlier).

Source : Equity Bulls

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