Rs.

544
Target Price: Rs.800
Potential Upside: 47%
Karur Vysya Bank Ltd.
Absolute Rating: BUY

Banking 15th April 2015 | For private circulation only

Karur Vysya Bank Limited (KVB) was set up in 1916 Tamil Nadu. As on December 31, 2013, the bank’s staff strength is 7,220, with 588 branches and
1630 ATMs across India. Branches in the South region account for 80% of its network and 67% of total business. The bank has declared 100% dividend Stock Data
since 2003-04. Since 2007-08, the dividend was 120% & 130% dividend was declared for 2013-14. Till date bank concluded 14 Rights issue and 7 Bonus
Market cap : Rs 5,766 cr
issues and KVB had been the first bank to get permission from RBI to issue bonus shares.
52 week high/low : Rs 618/ 363
Avg. daily vol. (6mth) : 185,112
Consolidation in the Old Private Sector Banks(OPSB) will upgrade valuation multiple
NSE code : KARURVYSYA
The consolidation in OPSB continues since 1990s , recently Kotak Mahindra Bank announced acquisition of mid – sized lender ING Vysya Bank, which BSE code : KARURVYSYA
was originally an old private sector bank (OPSB), known as Vysya Bank. Most of the OPSB banks are anywhere from 5 decades to 0ne century old.
However, gradually they are disappearing in the last 2 decades due to their acquisitions by the large banks. So far the large banks have acquired, apart
from this erstwhile Vysya Bank, Bank of Madura, Lord Krishna Bank and, Bank of Rajasthan in the OPSB space. Outside this OPSB segment, other mid- Shareholding (%) Dec-14 Sep-14
sized banks which have seen consolidation are: Centurion bank, Bank of Punjab, Bharat Overseas Bank, etc. In the process of these M&As, we have Promoters : 2.18 2.22
seen the valuation multiple (Price to Adjusted Book value) of OPSBs going up from as low as 0.5x about 15 years ago to over 2x now. We expect this
FIIs : 28.34 28.47
consolidation process especially in the OPSB to continue and hence, believe that their valuation multiple would see further upgrades;
DIIs : 18.12 17.78
Others : 51.36 51.53
Impressive Q3FY2015 results
In Q3FY2015, Karur Vysya Bank (KVB) has apparently posted muted growth in net profits at just 6.5% yoy. However, actually its results are quite
impressive: KVB grew its net profits at 6.5% yoy to Rs.113.8 crore despite provisions for non-performing assets more than doubling yoy from
Rs.50.70 crore to Rs.106.20 crore in December 2014 quarter; Net interest income grew 28.2% to Rs.391 crore during the quarter compared to Rs.305
crore in same quarter last fiscal; Other income climbed 39.3% to Rs.147.14 crore during the same period; Non-performing assets (NPAs) marginally
increased - Gross NPAs increased 44 basis points yoy (up 55 bps qoq) to 1.91% and Net NPAs rose 25 basis points yoy (up 14 bps sequentially) to
0.73% in December quarter. However, it should be noted that KVB is one of a few mid-sized banks to maintain the Net NPA (Non-performing assets) Founder & Managing Director
at less than 1%; Mr. G. Chokkalingam
chokka.g@equinomics.in
Branch expansion to increase business further
The bank has setup its 600th branch in Tamil Nadu. In the last 2 years, the management has become very aggressive in branch expansions – it set up
121 new branches in FY2013 and FY2014 – it is little more than half of total number of branches (231) it had 10 years ago (in FY2005) - we firmly
believe that the aggressive branch expansions of the bank in the last 2 years would play out positively on its bottom line over the next two years;

1 Equinomics Research & Advisory Private Limited - Investment Adviser

 Investment Rationale Cont…
Comparative Valuation of Private Sector Banks
Business
(Deposits + Net NPAs Adj. Book Price/ABV
Banks CMP Advances) (%) Value* (X)
City Union Bank Ltd. 95 39909 1.31 39 2.4
ING Vysya Bank Ltd. 1031 84210 0.66 377 2.7
Karur Vysya Bank Ltd. 544 79980 0.73 323 1.6
South Indian Bank Ltd. 25 82065 1.04 24 1.0
*(net worth as of September 2014 adjusted for the latest net NPA outstanding)

ING Vysya Bank is a close peer to Karur Vysya Bank – both of them have business size of around Rs.80,000 crore (as of September 2014). At the current market price of Rs.1031,
ING Vysya Bank trades at 2.7x its Adjusted Book Value of Rs.377 as of December 2014, whereas KVB trades at 1.6x its Adjusted Book Value of Rs.323. Consequent to the latest consolidation in
the mid-sized banking space, we expect the valuation gap between KVB and ING Vysya to narrow down.

Outlook & Valuations

The stock has under-performed the other successful banking stocks like IndusInd Bank in the last 18 months mainly due to 21% yoy fall in net profits in FY2014. During the last 2 years,
unfortunately the domestic economy also slowed down significantly leading to peaking of NPAs for the entire banking sector including KVB. This has led 53% yoy jump in employee costs and
259% yoy increase in “provisions other than tax” in FY2014. The additional burden on these two accounts alone stood at Rs.503 crore in FY2014! Whereas its net profit fell only by Rs.120
crore yoy in FY2014. In next 2 to 3 years, its new branches will start turning around and the NPA cycle in the country would reverse. This period eventually end
with KVB celebrating its 100th year in FY2016. Hence, we expect Karur Vysya Bank playing out in a big way in FY2016. Recently KVB mobilized Rs.625 crore through QIP which is
close to 1/5th of its net owned funds. These additional resources would improve its lending base significantly in the near future. Hence, we initiate “Buy” recommendation on the stock for
target price of Rs. 800 for next 2-3 years.

Financial Summary
Change PAT Change ABV Change P/ABV
Y/E Mar (Rs Cr) Net Interest Income (Rs Cr)
(%) (Rs Cr) (%) (Rs) (%) (x)

FY2013 1,158 26.3 550 9.7 278 13.2 1.9

FY2014 1,284 10.8 430 -21.9 297 7.1 1.8

FY2015E 1,541 20.0 558 30.0 313 5.2 1.7

FY2016E 1,973 28.1 791 41.8 383 22.6 1.4

Source: Company, Equinomics Research & Advisory Private Ltd

2 Equinomics Research & Advisory Private Limited - Investment Adviser

 Disclaimer
Stock Disclosure: Whether Stock Held By:
G.Chokkalingam & Family Equinomics
Karur Vysya Bank Ltd. YES NO

Equinomics Research & Advisory Private Ltd - Investment Adviser (SEBI REG. NO. INA000001712)
G. Chokkalingam - Founder & Managing Director
Head Office – Mumbai . 18 - A/3, Ekta CHS, Shivdham Complex, Opposite Fire Brigade, Near Oberoi Mall, Malad (East), Mumbai - 400097
Ph: +91 22 28492942 | Email: chokka.g@equinomics.in

Equinomics Research & Advisory Private limited (Equinomics) is a SEBI registered Investment Advisor. This document has been prepared by Equinomics Research & Advisory Private Ltd– Advisory Client Group. Besides, Equinomics is also Authorized
person of Tata Securities Limited (TSL). TSL or Equinomics Research & Advisory Private Ltd focused-broking division may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this
report. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating and target price of the Affiliates research report. The report and information contained herein is strictly confidential
and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent.
This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report
constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for
all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient.
Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and
should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including those involving futures, options and other
derivatives as well as non investment grade securities - involve substantial risk and are not suitable for all investors.
Equinomics has not independently verified all the information given in this document. Accordingly, no representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in
this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change
without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval.
Equinomics Research & Advisory Private Ltd, its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document.
They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each
other. The recipient should take this into account before interpreting the document.
This report has been prepared on the basis of information that is already available in publicly accessible media or developed through analysis of Equinomics. The views expressed are those of the analyst and the Company may or may not subscribe to all
the views expressed therein.
This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. Neither this document nor
any copy of it may be taken or transmitted into the United State (to U.S. Persons), Canada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof.
This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be
contrary to law, regulation or which would subject Equinomics Research & Advisory Private Ltd to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions
or to certain category of investors. Persons in whose possession this document may come are required to inform them of and to observe such restriction.
Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the
use of the information

Copyright of this document vests exclusively with Equinomics Research & Advisory Private Ltd.

3 Equinomics Research & Advisory Private Limited - Investment Adviser