Buy Karur Vysya Bank - Target Price Rs. 590 - Dolat Capital

- Karur Vysya Bank is our preferred pick among the old private banks We believe that the bank is well placed to grow at above industry average growth rates over the next few years.

- The bank has already put the infrastructure in place and offers all product suits to its customers. The bank's focus clearly remains to grow where it has core competency and keep the asset quality under control.

- Over the next two years we expect the bank to deliver average ROA of 1.3% driven by improvement in interest spreads and stable credit cost.

- The substantial branch expansion impacted the bank's ROA and ROE for FY13. We believe that the pace of branch expansion would be moderate as compared to FY12 and FY13. While we do expect the overhead cost to remain high in the near term, the improvement in spreads should lead to improvement in return ratios.

- The stock has corrected by around 20% over the past 3 months on concerns regarding asset quality, NIM and growth. However, we believe that asset quality should show an improving trend and fresh NPL formations should trend downwards. We do expect NIM pressure though temporary in our view.

- We find current valuations of 1.3x FY14E BVPS and PER of 7.6x on FY14E EPS attractive. We believe that the stock should trade at higher valuations and base our target price of Rs. 590 on PBR of 1.7x on our FY14E BVPS forecasts. Higher than expected pressure on asset quality and NIM are key risks to our call.

Source : Equity Bulls

Keywords