Bankable valuations

Karur Vysya Bank looks attractive on the valuation front, say analysts

According to mythology, Brahma began the work of creation in Karur, one of the oldest towns in Tamil Nadu. Built on the banks of river Amaravathi, the city traces its history back to the early Sangham days when it started flourishing as a trading centre.

Archaeological remnants, including mat-designed pottery, rare rings, bricks and coins, amply support Karur's status as one of the earliest trading centres in south India.

Historians argue that Karur may have been a centre for gold jewellery-making and gem setting. The city, whose chief produce include milled rice and brassware, is famous for its cottage industries. Karur had been ruled by the Cheras, the Naickers, Tippu Sultan and the British successively.

Despite the political fluctuations it witnessed down the centuries, the city retained its title as a commercial hub. Today, it is on the international textile map with its cotton fabrics, hosiery products and handloom 'made-ups'.

Traders in Karur started exporting handlooms in 1975 on a modest scale. Today Karur has hundreds of exporters. Handloom products exported from the city have been classified under three heads - kitchen, bathroom and bedroom furnituring items. The products are exported to Europe, USA, Japan, Canada, Australia, Singapore, South Korea, South Africa and the Scandinavian countries.

The handloom industry in Karur generates an annual turnover of Rs 1,000 crore, with Rs 700 crore of direct and indirect exports of textile goods. The development of export as a major trade has led to the impressive growth of other allied industries like powerloom weaving, tailoring, packaging, and dyeing and bleaching units.

Against this backdrop stems the importance of Karur Vysya Bank (KVB) which commenced operations with a view to supporting the textile industry in the city. Now that the domestic textile industry is poised for an upswing (with the end of the quota regime), the bank's fortunes, too, shall witness an upturn, say analysts.

One of the oldest private sector banks in India (the bank was set up in 1916), KVB does not appear to have received a fair share of valuations. Though the stock has gained 102.41 per cent in the last one year to current levels of Rs 345, analysts feel it has more steam left.

They cite several reasons for the bank to move forward - cheap valuations, lower non-performing assets (NPAs), a good credit-deposit ratio (CDR), a healthy capital-adequacy ratio (CAR) and a renewed focus on retail lending and trade financing.

Besides the bank is a good takeover target. Any bank looking for an exposure in south India can consider a merger or an acquisition with KVB as it has over 65 per cent of its operations centred in Tamil Nadu.

However, analysts caution that any downturn in the state economy could hit the bank. Another reason for the bank becoming a takeover target is its widely dispersed shareholding.

"The shareholding pattern of the bank makes it suitable for a takeover target," says an analyst. The public holds around 65.92 per cent of the bank's shares while FIIs, promoters and mutual funds and

FIs hold 4.61 per cent, 4.22 per cent and 6.35 per cent respectively. The rest is held by other entities. The bank is also taking initiatives to widen its fee-based activities.

It has tied up with Bajaj Alliance for cheque collections, Bharti Broadband for central data processing and Birla Insurance for selling insurance products.

Financials are improving
KVB has been posting impressive financials over the past one year. In the quarter ended December 31, 2003, it registered a 19.68 per cent increase in interest income to Rs 151.97 crore against 19.68 per cent in the corresponding previous quarter on the back of robust credit growth.

However, the bank took a hit in its other income, which fell over 90 per cent to Rs 5.09 crore due to a decline in treasury income. "Treasury income has decreased across the board and, therefore, is not a factor of concern," says an analyst.

Karur Vysya Bank
(Rs crore)	Q3FY04	Q3FY03	FY03	FY02
Interest income	151.97	126.98	515.61	482.30
Interest exp 86.35	86.40	86.40	346.55	371.73
Net int margin	43.18	31.96	32.79	34.12
Other income	5.09	52.31	132.46	104.70
Op profit	38.77	68.13	124.96	108.51
OPM (%)	24.68	38.00	19.28	18.49
Net profit	44.54	40.21	126.00	109.25
NPM (%)	28.36	22.43	19.44	18.61

However, the bank managed to hold fort with its net interest margin improving 31.96 per cent to 43.18 per cent in the period under review. For the year ended March 31, 2003, KVB posted a 6.9 per cent rise in its interest income to Rs 515.61 crore compared to the previous year.

Meanwhile, margins declined (34.12 per cent to 32.79 per cent), impacted by a rise in interest expenses. However, going forward analysts believe that interest expenses will be curbed in the lower interest rate regime.

Advances have followed a healthy trend, surging 36 per cent to Rs 3,344.40 crore for the year. Deposits also have shown a commendable rise in the year under review, posting a 22.53 per cent increase to Rs 5121.92 crore. The bank is confident of crossing Rs 11,000 crore of total business volume during fiscal 2003-04.

Though KVB had a very humble beginning with Rs 1 lakh of capital, it has faced myriad challenges in the past to emerge a leading domestic bank with strong fundamentals. Breaking the regional flavour with which it began operations, the bank has spread its wings with 216 branches in 10 states.

But concerns remain
The main concern is that the bank is over-exposed to a single state. "Concentration in a single state increases the risk for the bank," says an analyst.

KVB has most of its operations centred around the textile industry in Tamil Nadu. But with the industry looking up and export possibilities improving, NPAs caused by sick textile units have seen a turnaround.

"The bank has taken initiatives in loan-recovery, reducing NPA levels," says an analyst. Its NPA levels reduced from 6.3 per cent in 2002 to 4.2 per cent in 2003. KVB expects to further reduce its NPAs to below 2 per cent in the current year.

P/E as on 17 Mar 2004
Oriental Bank	9.44
Vijaya Bank	5.37
J&K Bank	5.17
Federal bank	4.98
Canara Bank	4.37
Karnataka Bank	3.81
Karur Vysya	3.77
IOB	3.66
Bank of Raj	3.49
Allahabad Bank	3.09
Dena Bank	2.20

Valuations look attractive
It has been a valuations game for the bank. "KVB never got good valuations," says an analyst. But going ahead analysts are optimistic about the kind of valuations KVB must get.

Relative to its peers, KVB definitely looks attractive. A consensus estimate gives us an EPS of Rs 86 for FY04 and an EPS of Rs 108 for FY05. Currently, the stock trades at a P/E multiple of 3x for FY05 earnings.