This Small Cap Banking Stock Reported 15% YoY Credit Growth, Brokerage Says Buy For 39% Returns

A leading brokerage firm Emkay Global has recently published a report on Karur Vysya Bank post the bank declared the Q1FY23 results. The brokerage recommends buy the stock of the bank for a target price of Rs 78 apiece. The bank reported a strong PAT beating the estimates of the brokerage. Further, the stock of the company has the potential to surge around 39% upside in the next 12 months, taking the stock's Current Market Price and the brokerage's estimated target price of Rs 78 per share into consideration.

Stock Outlook & Results

The current market price of Karur Vysya Bank's share is Rs 56.40 apiece after falling 4.09% on 27 July, it was opened at Rs 58.45 apiece, while the previous close was Rs 58.70 apiece. Currently, the share is trading at Rs 18 above its 52-week low levels and roughly Rs 4.3 below its 52-week high levels, respectively. The stock hit the 52-week low on 23 August 2021 at Rs 38.40 apiece and 52-week high on 15 November 2021 at Rs 60.70 apiece, respectively.

In terms of returns, the stock performed decently over the last 1 year, given positive returns of 18.36%. In the past 1 week and 1 month, its shares gained 18.49% and 22.88%, respectively. However, the stock didn't perform well in the long term. In the last 3 years, the stock has fallen 14.16% and 54.75% in the past 5 years, respectively.

Stock Details
CMP	Rs 56.40
Target Price	Rs 78
Potential Upside	39.00%
Market Cap	Rs 4,508.07 Cr
1-Year Return	18.36%
3-Years Return	-14.16%
5-Years Return	-54.75%

Growth accelerates as asset-quality stress largely behind

Karur Vysya Bank surprised positively with 15% yoy/4% QoQ credit growth, backed by strong growth in the commercial and agri segments. Retail growth was also reasonable at 11% yoy/3%, mainly driven by mortgages, auto and jewel loans. The bank has guided for healthy growth trajectory in FY23 & beyond as its asset-quality issues are largely behind. The demand scenario has also improved post-Covid. Additionally, the bank has created a channel (Neo) which will drive its retail asset growth and hence will improve its retail orientation and long-term RoA sustainability. To grow its MSME book, the bank has also entered into co-lending partnerships.

Lower slippages, strong recovery to reduce NPAs

Fresh slippages in Q1 at Rs1.4bn (1.1% of loans) were surprisingly low among the last 25 quarters, mainly due to the lower stress in the corporate book. This, coupled with higher recoveries and w-offs, led to a 75bps QoQ reduction in the GNPA ratio to 5.2%. The restructured pool declined QoQ to 2.6% of loans from 3% in Q4FY22. The bank has guided for net negative slippages in FY23, which, coupled with a healthy provision cover (~65%), should keep incremental credit costs in check.

Brokerage comments on Results

The brokerage said, "Karur Vysya Bank reported a strong beat on PAT at Rs 2.3bn vs. our estimate of Rs1.9bn, driven by better margins, higher other income and lower provisions. The bank is well on track after the clean-up in FY18-20, with the GNPA ratio trending down to 5.2% in Q1 from the highs seen in Q1FY20 of 9.2%. The RoA has also shown an improving trend and has now remained >1% for the second consecutive quarter."

Overall credit growth surprised positively at 15% yoy/4% QoQ, backed by strong growth in commercial/agri and continued momentum in retail. This, coupled with better investment yields, led to a nearly stable but healthy margins at 2.8%. The bank has guided for continued healthy growth momentum, NIM at 3.75% and lower LLP, which all should lead to a RoA of 1.1% in FY23.

The brokerage added, "We raise our FY23/24/25 EPS estimates by 10%/8.0%/8.3% respectively, mainly driven by better growth and lower LLP, while its otherwise higher cost ratios should also see a moderation. We expect the bank to report a steady improvement in its RoA/RoE profile to 1-1.2%/11-14% from sub-1%/10% in the past five years."

Brokerage comments on valuations, suggests buy for a target price of Rs 78 apiece

The brokerage said, "We expect the bank to report a steady improvement in its RoA/RoE profile to 1-1.2%/11-14%, recovering from sub-1%/10% in the past five years. Retain Buy on KVB with a revised Target Price of Rs 78, valuing the bank at 0.7x Jun'24E ABV. We like KVB in the small-cap space given its steady improvement in RoE profile and management stability, bestin-class capital profile (Tier I >17%) and attractive valuations (0.5x FY24E ABV). The high dividend yield of 4-5% adds to the comfort. The key risks to our call/estimates include higher NPA formation, mainly in the SME portfolio, and a slowdown in credit growth due to macro developments."

 

Disclaimer

The stock has been picked from the brokerage report of Emkay Global. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.