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    Andhra Bank: Quality Franchise at Attractive Valuation

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    Bharat
    1) The report recommends buying shares of Andhra Bank, which posted strong volume growth and improved margins and asset quality in recent years. 2) It expects the bank to maintain robust growth and profitability over the next few years, with credit expanding 21.5% annually and return on assets reaching 1.21% by FY2012. 3) It maintains a buy rating for the stock with a target price of Rs266, which trades at an attractive valuation currently.

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    Andhra Bank: Quality Franchise at Attractive Valuation

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    Bharat
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    1) The report recommends buying shares of Andhra Bank, which posted strong volume growth and improved margins and asset quality in recent years. 2) It expects the bank to maintain robust growth and profitability over the next few years, with credit expanding 21.5% annually and return on assets reaching 1.21% by FY2012. 3) It maintains a buy rating for the stock with a target price of Rs266, which trades at an attractive valuation currently.

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    1) The report recommends buying shares of Andhra Bank, which posted strong volume growth and improved margins and asset quality in recent years. 2) It expects the bank to maintain robust growth and profitability over the next few years, with credit expanding 21.5% annually and return on assets reaching 1.21% by FY2012. 3) It maintains a buy rating for the stock with a target price of Rs266, which trades at an attractive valuation currently.

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    Download as PDF, TXT or read online from Scribd
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    61 views3 pages

    Andhra Bank: Quality Franchise at Attractive Valuation

    Uploaded by

    Bharat
    1) The report recommends buying shares of Andhra Bank, which posted strong volume growth and improved margins and asset quality in recent years. 2) It expects the bank to maintain robust growth and profitability over the next few years, with credit expanding 21.5% annually and return on assets reaching 1.21% by FY2012. 3) It maintains a buy rating for the stock with a target price of Rs266, which trades at an attractive valuation currently.

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    of 3

    October 1, 2010

    BANKING
    COMPANY UPDATE

    Institutional Equities Andhra Bank (Rs160)


    Buy
    India Research Target Price: Rs266

    Stock Data Quality franchise at attractive valuation


    Bloomberg Code ANDB.IN
    Andhra bank posted quality volume growth in total business of 26.5% (CAGR in
    Market Cap. (Rs bn / US$ bn) 77.6/1.7 FY08-10) with improvement in margin on the back of lesser liability costs and
    reported further improvement in asset quality. Going forward in FY10-12, we
    52-week High/Low (Rs) 170/95
    expect compounded growth of 21.5% in business with slight improvement in
    Shares Outstanding (mn) 485 margin to 2.96% in FY12 from 2.84% in FY10 mainly driven by faster re-pricing
    of assets. We estimate the bank's return ratios to remain robust; traction in
    Avg. daily volume ('000) 1,459
    return on assets would come from higher margin, operating cost efficiency and
    Avg. daily value (Rs mn) 170 lesser credit cost though much lower treasury gains would dent the profitability.
    We estimate that in FY12, the bank would report RoAA and RoAE of 1.21% and
    Promoter holding (%) 51.6
    24.9% respectively. We maintain our earning estimates for FY11 and FY12 and
    Free float (%) 48.4 reiterate our BUY rating with a price target of Rs266 at 2.1x adjusted book
    value FY12.
    FII holding (%) 14.1
    • Strong volume growth: We expect credit book expansion would mainly be
    driven by SME, retail and agriculture sectors. In recent past, growth in SME
    Relative Performance sector came from across segments particularly from rice mills, iron &
    steel and textile industries. The bank's retail loans composition is still
    80
    contained at 15.5% and it is expected that the bank would further increase
    60 exposure to the sector; under the sector, high-yielding non-agriculture gold
    40 loans reported robust growth of three times to Rs13.8 bn. Going forward,
    the bank's management expects strong growth in the sub-segment to
    20
    continue.
    0

    (20) (Rs mn) FY2008 FY2009 FY2010 FY2011E FY2012E


    30-Sep-09 31-Mar-10 30-Sep-10 Total Net Income 19,660 23,923 31,594 36,865 44,533
    Andhra Bank BSE-Sensex Profit before provisions 10,600 12,880 18,098 21,180 25,963
    NIM (%) 2.7 2.7 2.8 2.9 3.0
    Net Profit 5,786 6,531 10,459 11,658 14,396
    BSE Sensex 20,069
    EPS (Rs) 12 13 22 24 30
    EPS Growth (%) 8 13 60 11 23
    P/E (x) 13.4 11.9 7.4 6.7 5.4
    Price/Book Value (x) 2.4 2.1 1.8 1.5 1.2
    Price/Adjusted Book Value (x) 2.4 2.2 1.8 1.5 1.3
    Dividend Yield (%) 2.5 2.8 3.1 3.6 4.1
    Cost-to-income (%) 46.1 46.2 42.7 42.5 41.7
    ROA (%) 1.1 1.0 1.3 1.2 1.2
    ROE (%) 18.1 18.9 26.0 24.1 24.9
    Rakesh Kumar
    Tier-1 Capital (%) 8.5 8.7 8.2 7.9 7.7
    rakesh.kumar@karvy.com
    +91-22-22895028 Source: Company & Karvy Institutional Research

    Karvy Institutional Equities • 2nd Floor, Regent Chambers, Nariman Point - Mumbai 400 021 • +91-22-2289 5000.

    For Private Circulation only. For important information about Karvys’ rating system and other disclosures refer to the end of this material.
    Karvy Stock Broking Research is also available on: Bloomberg - KRVY <GO>, Thomson Publisher & Reuters.
    October 1, 2010

    Institutional Equities Andhra Bank

    • Expansion in margin: The bank's margin is expected to expand on the back of faster
    re-pricing of assets. On asset-liability maturity analysis, almost 40% of the bank's
    advances and 60% of deposits would come for re-pricing in a year time horizon.
    The bank's 70% of deposits come from retail and whole-sale term deposits and rest
    from CASA deposits. Almost 60% of the total term deposits (42% of aggregate
    deposits) could come for re-pricing in a year time. On credit book side, almost 65-
    70% of advances are on floating rate basis; on 2nd August'10 the bank increased
    its BPLR by 50 bps to 12.5%. Fresh advances disbursed on base rate system would
    be re-priced with a time lag. In increasing interest rate scenario, higher proportion
    of advances would come for re-pricing since almost 65-70% of advances are based
    floating rate leading to improvement in margin.
    • The bank's fee based income would gather pace on the back of higher credit
    processing volume, demand for non-fund based products from corporate and
    traction in insurance venture income.
    • The bank's management does not expect any major strain on asset quality going
    forward; as on end-June'10, the bank had gross NPA and net NPA of 1.01% and
    0.30% respectively with provision coverage of 86% (including technical write-offs)
    and 71% (excluding technical write-offs).
    We maintain our earning estimates for FY11 and FY12 and reiterate our BUY rating with
    a price target of Rs266 at 2.1x adjusted book value FY12. At current price, the stock
    trades at 1.26x ABV FY12.

    2
    Institutional Equities

    Stock Ratings Absolute Returns


    Buy : > 25%
    Out Performer : 16 - 25%
    Market Performer : 0 - 15%
    Under Performer : < 0%
    Sell : <(25%)

    Hemindra Hazari
    (Head of Research)
    hemindra.hazari@karvy.com

    For further enquiries please contact:


    research@karvy.com
    Tel: +91-22-22895000

    Disclosures Appendix

    Analyst certification

    The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies)
    and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report.

    Disclaimer

    The information and views presented in this report are prepared by Karvy Stock Broking Limited. The information contained herein is based on our analysis and upon sources that we consider reliable.
    We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments
    discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial
    position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor
    Karvy Stock Broking nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document.

    The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. Every employee of Karvy and its associate
    companies are required to disclose their individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are
    restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further
    restricted to place orders only through Karvy Stock Broking Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any
    opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures nor other derivatives related to such securities.

    Karvy Stock Broking Limited


    Institutional Equities
    2nd Floor, Regent Chambers, Nariman Point - Mumbai 400 021.
    Regd Off : 46, Road No 4, Street No 1, Banjara Hills, Hyderabad – 500 034.

    Karvy Stock Broking Research is also available on: Bloomberg - KRVY <GO>, Thomson Publisher & Reuters.

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