We recommend to BUY Karur Vyasa Bank (KVB)::Motilal oswal,

We recommend to BUY Karur Vyasa Bank (KVB) with a 12month
price target of `725 , valuing it at 2.25x P/ABV multiple on FY14
estimated book.
INVESTMENT ARGUMENTS:
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 `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
`58000Cr currently to `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 `725 (P/ABV 2.25x FY14E, P/E 11x FY14E).

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