Buy Karur Vysya Bank, target price Rs 49: Anand Rathi

Anand Rathi has given a buy rating to Karur Vysya Bank with a target price of Rs 49. The share price moved up by 1.04 per cent from its previous close of Rs 33.75. The stock’s last traded price is Rs 34.10.

Higher margins and lower credit cost led to a sharp 40 per cent year on year earnings growth for the bank, says the brokerage. Asset quality and PCR improved. Given the bank’s strong capitalisation, coverage and liquidity than its regional peers, it is better placed to withstand Covid’19-related stress. However, with the anticipated slower growth and lower earnings in FY21, Anand Rathi has cut its P/ABV multiple to 0.6 times (earlier 0.8 times ), with a lower target price of Rs 49 (earlier Rs 66).

Investment Rationale

According to the brokerage, a higher delinquency rate is expected in the second half of FY21 and credit cost is expected to be high in the medium term. Higher credit costs combined with weaker operating performance (attributed to slower business growth) would keep the bank’s earnings weak in FY21. The brokerage estimates -0.7 per cent RoA for FY21 and 1.1 per cent for FY22.

The brokerage’s June’21 target of `Rs 49 is based on the two-stage DDM model. This implies a 0.5 times P/BV and 0.6 times P/ABV multiple on its FY22e book.

Risks: Lumpy slippages from the corporate book; stress in the SME book.



Financials

For the quarter ended March 31, 2020, the company reported standalone interest income of Rs 1143.95 crore, down -.73 per cent from last quarter Interest Income of Rs 1152.36 crore and down -1.49 per cent from last year same quarter Interest Income of Rs 1161.28 crore. The bank reported net profit after tax of Rs 83.70 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 2.11 per cent stake in the company as of March 31, 2020, while FIIs held 21.59 per cent, DIIs 22.8 per cent and public and others 53.5 per cent.