Karur Vysya Bank - Multibagger Stock Pick

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a healthy rate for the next 3-5 years and create wealth. We like to
select companies with strong competitive advantages and are quoting at
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Karur Vysya Bank (KVB)
- Highly Efficient Mid-Cap Bank + A Steady Compounder

Content Index

• Karur Vysya Bank – Investment Snapshot :- Slide #4

• Industry Opportunity – An Overview:- Slide #6

• Karur Vysya Bank – Business Overview :- Slide #11

• Investment Rationale :- Slide #17

• Karur Vysya Bank – Financials:- Slide #23

• Concerns & Reasoning :- Slide #25

• Conclusion :- Slide #29

“ Specialists in discovering Multibagger stocks “

Karur Vysya Bank (KVB) – Investment Snapshot
(as on April 26, 2012)
Recommendation :- BUY KVB was started in the year 1916 in Karur by the duo of
Accumulation Range :- 370-400 M.A.Venkatarama Chettiar & Athi Krishna Chettiar with a
Returns Expected :- ~25% CAGR seed capital of just around 1 Lakh Rs.

Current Market Price – Rs. 400.75 KVB has since then consistently grown into a leading
financial institution, offering banking services to Millions
Bloomberg / Reuters Code – KVB IN/ KARU.BO of customers and a Market Capitalization of 4300 Cr Rs. It
is one of the few Old Private sector banks which continues
BSE / NSE Code – 590003 / KARVYS to operate well in the changed scenario.

Mkt Cap (INR BN / USD Mn) – 42.91 / 818.9 KVB has made profits consistently for the past 95 years of
[1 USD – Rs. 52.40] its banking operations. It has also declared uninterrupted
dividend since its inception.
Total Equity Shares [Mn]– 107
KVB from being a Tamilnadu centric bank has started
Face Value – Rs. 10 expanding its operation across the nation with the
opening of several branches in North India. This helps in
52 Week High / Low – Rs. 437 / Rs. 315 diversifying its base and also decrease the risk of
geographical concentration.
Promoter’s Holding – 3.26 %
Karur Vysya Bank has been a strong institution with well
Institutional Holding – 27.88 % entrenched business relationships with its customers. KVB
is known for its Customer Service and Trust amongst its
clients, depositors and shareholders.


Key Investment Highlights
Modern Old Private Sector Bank – KVB is one of the most efficient bank in India. Most of the Old private
sector banks have not been able to grow out of their geographies or community base, but KVB is as good as
any New-Age Private sector banks. It is one of the early adopters of technology in their operations and all its
branches are CBS enabled. KVB has also been able to modernize itself on all fronts.

Healthy Growth Story – KVB has been growing at a healthy pace over the past several years on all fronts. Its
Net Profit has been able to Compound at over 20% from 2007-11 which displayed resilience of the bank’s
profitability in spite of the economic downturn. Its branch network has increased by more than 50% in the
past 5 years indicating the potential growth and Margin expansion in the coming years.

Efficiency Parameters – KVB is well capitalized with a strong CAR of over 13.25%. NIM’s are strong at 3.06%,
RoAA is at 1.54%, Net NPA’s less than 0.3% and Coverage Ratio of over 80% which shows the operational
quality of the bank. Bank has been able to maintain low NPA’s in spite of significant business growth over the
past few quarters, indicating the superior Credit appraisal processes .

Share-Holder Friendly Bank – KVB has been a very shareholder friendly bank with a dividend of 120% for
the past 5 years. During FY 2010-11, the bank has rewarded its shareholders by Bonus shares at 2:5, and also
issued rights shares at 2:5 (after bonus) with a low premium of Rs. 140. We expect similar offering from the
bank during its Centenary year of 2016.

Hugely Attractive Valuations – KVB in spite of above average fundamentals is not getting the premium
valuation it deserves. It is quoting at nearly half the P/B or P/E of banks like HDFC and IndusInd which
provides scope for valuation expansion in the coming days. KVB’s attractive valuations has already started
attracting “Smart Money” from several reputed investors.


Industry Opportunity & Potential
- An Overview


Indian Growth Story
• Though there are people who have
started to doubt the Indian Growth story,
we are very bullish on it. We feel this is a
passing phase and India will get back to a
high growth trajectory.

• We also believe that the “Best of Indian
Growth” is ahead of us and the country
will enter into a phase where it will
achieve near double-digit growth for
several years in a row.

• Banking is the best bet to profit from
the country’s GDP growth. As a thumb
rule, Banking sector growth is usually
2.5X the GDP growth.

• Indian banks are well run and have good
return ratios when compared with banks
across the developing economies.

• With a strong regulator in RBI, our
banking system is mature enough to
handle Macro-Economic risks.

Robust Banking Growth
Huge Moats for Banks :-
• India as a country is still very much
under banked and there is a huge
scope for improving the banking
penetration and expanding the system.
• There has been no new banking
licenses issued in the past decade and
any growth in the country is being
shared within the existing banks.
• Demand for Financial services
outstrips the supply which is helping
BANKEX has grown from 1,700 to
the banks to grow profitably and this
15,000 in less than 8 years will continue in the next decade.
• Banking shares have been one of the
top performers in the last decade with
a high compounding growth.
• Efficient banks will continue to garner
market share and will grow at a higher
pace than the Industry and these
stocks are low-hanging Multi-Baggers.


Cyclical Banking Uptrend

• Indian Banking has suffered a lot during the past 18 months because of high inflation and steep RBI hikes.
Interest rate cycle has topped out and we can expect the banks to perform well going forward.
• High Interest rates affect credit demand, Increases NPA leading to lower NIM’s and Profits for the banks.
With RBI reducing CRR and Repo rate aggressively, we can expect the banking margins to improve.
• Banks which are not saddled with high Restructured Assets will gain from this reversal and continue to
grow handsomely in the coming quarters.


Bullishness on Private Banks Vs Public Sector Banks
• Indian Private sector banks have
outperformed Public sector banks on all
fronts and gained a strong foothold.
• Public sector banks have to deal with
Government Interference, Low
Capitalization and Banking unions which
have led to increased volatility in their
business performance over the decade.
• We are very positive on the future of
the Indian private banks and we believe
that they will continue to gain market
share because of their efficiency.
• Though PSB stocks are available at
cheaper valuation, we think that the
Net Profit Margin markets are pricing the high risk
associated with them.
• Moreover, even at higher valuations
Private Bank stocks have outperformed
PSB by a good margin.
• Within Private Sector Banks, efficient
banks like KVB has performed even better
on both business and stock markets.


Karur Vysya Bank – Business Overview


Key Highlights
Strong Parameters
ROE – 20%
ROA – 1.5%
NIM – 3.06%
Cost/ Income – 40%
Robust Track Record Gross NPA – 1.4%
Net NPA – 0.29% Branch Expansion
KVB’s share price has multiplied by
20X in the past 10 years and over KVB has been on a branch
150X in the past 20 years indicating expansion spree. Nearly 150 new
the wealth creation in the stock. branches has been opened in the

KVB plans to achieve Total Business
Karur Vysya last 4 years, taking the total
Branch network to 450. Bank
of 1.25 Lakh Cr business by 2016
which implies a CAGR of >23%
Bank plans to grow its network by 10%
YoY in various geographies.

Healthy Culture + Excellence Awards
Trusted Brand
Bank has a strong discipline in Bank has been recognized for its
maintaining its lending mix, risk operational excellence with Best
mitigation and customer profile. Bank awards from CNBC, Business-
Today, KPMG, IDBRT, FE etc.
Management has a good vision for
the bank with strong execution skills
and experience.


Distribution Network
STATE Branches
Branch Split-Up Metro
TAMILNADU 228 Category Dec 11 Rural 18%
ANDHRA PRADESH 97 14%
On-site ATMs 433
KARNATAKA 34
MAHARASHTRA 25
Off-site ATMs 272 Semi-
GUJARAT 15
Urban Urban
KERALA 11 Total 705 29%
39%
DELHI 8
WEST BENGAL 8 • Karur Vysya Bank has a strong Distribution network with most of its
PUNJAB 5 branches located in Tamil Nadu + Andhra Pradesh where it has a strong
HARYANA 4
brand image and rich legacy.
ORISSA 4
• Management is opening new branches across India to diversify and
M.P. 3
reduce its Geographic concentration. Bank has been able to do good
UTTARPRADESH 3 business even from its non-traditional geographies.
PONDICHERY 2
RAJASTHAN 2 • KVB is expanding its branches at 10% YoY and this along with normal
CHANDIGARH 1 business growth will help it to achieve its Target Business of 1,25,000 Cr
CHATTISGARH 1 business from the current 52,000 Cr by 2016.
GOA 1
• KVB has good % of its branches in Semi-Urban and Rural markets which
JHARKHAND 1
has helped it to meet its Priority lending targets easily. KVB has also been
Grand Total 452
able to build a strong Agri lending portfolio over the years.

Rich History + Fresh Energy

• Karur Vysya Bank in spite of being one of the oldest Private sector banks in the country, has been the
frontrunner in adopting new technologies and changing itself to meet the need of its young customers.

• All the 452 Branches of the bank are CBS enabled. KVB is not burdened with the legacy problems like other
OLD banks and has also diversified itself from its core community base.

• KVB now provides all kinds of new services to its customers which young private sector banks like ICICI,
HDFC and Axis provide. KVB provides Internet Banking, Credit Cards, Mobile banking, NRI banking etc.

• KVB has a strong internal culture which helps it to grow aggressively without compromising on the quality
of growth. Top management have been dynamic and highly professional.


KVB - Banking Parameters
35000
30000 KVB’s Owned Funds in Rs Cr

30107
25000

24722

22263
20000

19272

18052
15000
15101

13675
12550

10000
10563
9569

5000
0
07-08 08-09 09-10 10-11 Dec 11

Deposits Advances
• Karur Vysya Bank has been able to grow its
banking operations at a steady rate.

• In spite of good growth in Business, KVB’s Non-
Performing assets have been flat.

• Karur Vysya generates strong internal accruals
leading to lower equity dilution when compared
with other private sector peers.

• KVB’s owned funds has grown at a compounded
rate of around 18% in the past 5 years.


Important Parameters

• KVB’s fee income now contributes to
more than 3/4th of its other income. Fee
income of a bank is a steady cash
business and its growth is a good sign.
• Company’s profits are less dependent
on the Treasury sale profits which
reduces the volatility in its earnings.
• RBI’s rate cuts of 75-100bps will
increase PoSI in the next fiscal year.


Investment Rationale


Margin Levers
KVB’s Business Mix KVB’s Deposit Profile

• Karur Vysya Bank’s CASA ratio has been slipping for a while. Partially due to the interest rate environment
favoring FD’s and partially due to new branch additions. The new branches when mature, will provide scope
for increasing the CASA ratio. Management has targeted achieving a CASA ratio of 30% in the medium term.

• Karur Vysya Bank’s Credit-Deposit ratio is less than 73% which provides scope for improvement and this
will lead to better margins. Also with the cut in CRR, KVB will have sufficient scope to hold (or) improve its
NIM’s. We expect the margins to bounce back to their average levels in the medium term.

• Operational efficiencies and Fee income will also get a decent boost with the tie-ups with 3rd party
providers and branch addition. These along with Cyclical Banking improvements will lead to better Margins
and Profits for Karur Vysya bank.


10 Year Snapshot

• KVB has shown consistent growth in operating income and profits for the past 10 years. There was a major
drop in profits in 2004-05 because of a increasing interest rate environment which led to higher provisioning
on its treasury portfolio and one-off shift in the value of its Bond holdings.
• Presently, treasury operations contribute less to its overall profits and moreover a drop in the current
interest rates will lead to higher MTM profits from its bond holdings. KVB’s 10 year performance is as good
as any other Top Bank in the country.

Awards & Recognition

KVB’s performance has been well recognized with several awards like,
 Best bank Award for Mobile Banking among small Banks - IDRBT Banking Technology Excellence Awards, 2010-11, by
IDRBT, Hyderabad.
 Best Cost Efficient Private sector Bank- FIBAC Best bank Award,2011 by FICCI & IBA.
 Best Old Private Sector Bank – CNBC TV 18 Best Banks & Financial Institutions Awards 2011 by CNBC-TV18 & MCX.
 Best Old Private Sector bank Runner up – FE India Best Bank Awards,2011.
 EDGE AWARD from Information Week Magazine for Best IT implementation.
 Business World – Price Waterhouse Coopers Best Bank Awards, 2011 – Best Small Bank and Fastest Growing Small Bank.
 Business Today – KPMG - Best Mid-sized Bank - Quality of Assets. Second Place in the Mid-sized banks category.


KVB Vs other Banks

• Banking is a business of getting deposits and lending them profitably. On the lending front, KVB has a
strong ingrained culture for better risk appraisal which shows in the NPA numbers. KVB has very little
exposure to the stressed sectors like Airlines, Infrastructure, SEB’s etc. Hence, we can expect KVB to report
decent NPA going forward.

• The bank has better recovery mechanisms and adequately provides for Provisions which makes sure that
the Bank is well capitalized to handle any risks. KVB’s wrote-back several provisions which it had provided for
during the downturn of 2008-09 and this boosted its profits tremendously in the next year.

• Karur Vysya Bank has the highest (Profit After Tax/ Average Assets) amongst all banks in the past 5 years.
Consistent Fee income growth is one of the important reasons for this achievement.

Comparative Valuations
Peer Banks Operational Parameters Valuation Parameters
Private Sector ROA (E) NPM RONW ROE (FY-11) PE Ratio Dividend Yield
HDFC Bank Ltd. 1.60% 16.09% 15.47% 16.75% 24.6 3%

Dhanlaxmi Bank Ltd. 0.50% 2.49% 3.02% 4.06% 20.96 1%

Development Credit Bank Ltd. 1.30% 3.31% 3.62% 14.20% 19.88 1%

ICICI Bank Ltd. 1.34% 15.91% 9.27% 9.66% 18.97 2%

ING Vysya Bank Ltd. 0.91% 9.56% 12.05% 13.45% 17.62 1%

YES Bank Ltd. 1.50% 15.56% 19.17% 21.13% 17.5 1%

Axis Bank Ltd. 1.47% 17.20% 17.87% 19.34% 13.59 1%

Karur Vysya Bank Ltd. 1.54% 16.82% 20.71% 22.26% 10.32 3%

South Indian Bank Ltd. 1.00% 11.10% 17.31% 18.52% 9.24 2%

Karnataka Bank Ltd. 0.89% 7.80% 8.39% 9.63% 8.54 3%

Lakshmi Vilas Bank Ltd. 0.80% 8.49% 12.44% 13.04% 7.88 2%

Jammu & Kashmir Bank Ltd. 1.30% 15.23% 17.68% 18.96% 7.19 3%

• KVB in spite of strong operational parameters which is inline with Large banks, has been quoting at a
significant valuation discount to them. In all important parameters like ROA, NPM and RONW - Karur Vysya
Bank is amongst the top 3 private sector banks which indicates its efficient operations.


Financials


Earnings Projection
Income Statement (INR Cr) FY 10 FY 11 FY 12E FY 13E
Net Interest Income 564 766 902 1118 • KVB’s top-line will grow at a
healthy pace due to strong
Other Income 247 264 318 384 growth in its lending book and
Total Income 812 1031 1220 1502 Other income growth.

Salaries 163 229 263 327 • There has been a compression
in margins due to cyclical factors
Overheads 349 430 525 645
in banking. We expect margins
Total Provisions 37 39 107 158 to rebound from FY-14.
Tax 90 146 103 158
• We don’t expect any significant
PAT 336 415.6 482 536 equity dilution in the coming 2
years and hence ROE will
Diluted EPS 62.2 44.9 45.2 50.1
increase owing to better
leverage of funds.

• Provisioning demand will start
ROAA % 1.7 % 1.7 % 1.5 % 1.3 %
to moderate which will provide a
strong boost to the bottom-line
ROAE % 22.6 % 22.3 % 20.2 % 18.7 % of Karur Vysya Bank.
Adjusted Book Value 174 223 251 286

Specialists in discovering Multibagger stocks “

Concerns & Reasoning
1.) Decreasing Return Ratios :
Banking being a cyclical industry goes through bad phases (past 2 years) when there is a huge increase in the
interest rates which affects NPA’s, Provisioning, Treasury Operations, NIM’s etc. Evidently these get reflected
in the lower ROA’s and ROE’s. With the Interest rate cycle reversal, we expect the bank to maintain or
slightly improve its Return ratios going forward.

2.) Muted Bottom-line Growth in the past 2 years :
Banks bottom-line has not grown significantly because of the compressions in margins. This is due to steep
interest rate increase, new branch addition etc. Growth in expenses will moderate and this along with
stabilizing NIM’s will help the banks bottom-line to grow at a similar pace to that of its top-line.

3.) Low CASA Ratio :
KVB’s lower CASA ratio is a matter of concern and the management intends to shore this up in the coming
quarters which will help in better margins. Moreover, high interest rates led retail customers to move to
competing savings products and attractive FD’s. KVB’s branch addition will help it in building a strong CASA
franchise in the coming years.

4.) Lower Retail Assets:
KVB’s loan portfolio has very little Auto loans, Personal loans etc. But, company works with NBFC’s to sell
customized lending solutions to its customers. Thus, the bank hopes to boost its Fee income which is a
strong source for profits. Company has tied up with M&M Finance to provide tractor loans to its clients.


Conclusion


Price Chart
Share Dec Sept June Mar
Holding % 2011 2011 2011 2011
KVB Price Range
Promoters 3.26 3.27 3.46 3.51

FII 21.2 20.92 22.63 21.43

DII 6.68 6.79 4.83 4.23

• KVB is the best performing banking stock in
the past 12 months. It has out-performed
BANKEX by a significant margin. This shows
the stability of the stock.

• KVB has been trapped in a price range with
very little price volatility. With good results
expected over the next 2 quarters, we expect
the stock to break out of its trading range and
deliver good returns for its shareholders.


KVB’s Attractiveness
• KVB has been trading at the middle
end of its historic valuations in spite of
better business performance.

• KVB with improved fundamentals,
P/E Band increased scale of operations and
higher Return ratios will tend to trade
at >2X Book value in the future.

• Stocks attractiveness has attracted a
lot of good investors (or) Smart money
with the likes of Chryscapital picking
Recent Bulk Deals in KVB :- up a significant chunk in the bank.

• Indian Market’s Legendary investor
1.) Chryscapital – 3.91% on Mar-9, 2012.
Rakesh Jhunjhunwala continues to
2.) Wharol – 1 Million shares on Mar-20, 2012. hold KVB stock for more than 15 years
3.) Goldman Sachs – 0.8% on Mar- 21, 2012. which shows his conviction in the
3.) Olympus Capital – 4.8% on Apr-18,2012. growth of the bank.

Big Bull Rakesh Jhunjhunwala holds over 4.3% stake in KVB. • Once shares change hands from weak
investors to smart investors, the stock
will be ready for a good bounce.


Conclusion
We believe that Indian Banks are the best proxies to profit from the Country’s growth. When the country
is expected to grow at near double digit rates over the next several years, country’s banks should grow at a
rate of 2.5 times the GDP growth and Karur Vysya Bank being a well run bank should definitely out perform
the industry by a few basis points and that is a very serious growth of over 20% consistently. With its low
base, KVB will continue to increase its market share profitably.

Karur Vysya Bank’s margin levers along with its increasing scale is not being reflected in its stock price. It’s
hugely undervalued when compared to other well-run private sector peers like Yes Bank, IndusInd Bank,
Axis, HDFC etc. This is for a Bank which has one of the lowest NPA’s, High ROE’s, Low Cost/Income Ratio and
Highest Net Profit/ Total Assets which indicates the quality of its operations.

A well managed Private sector Bank with the best Industry Parameters is available at 1.4X its Projected
Book and less than 8X its Fy-13 Earnings. Its not rocket science to understand that, we are buying into the
stock at attractive valuations. Risk in the investment is very low considering its consistent Performance under
difficult circumstances over the past several decades. Moreover, KVB’s uninterrupted dividend along with its
present Dividend Yield of over 3% makes it highly attractive.

Karur Vysya Bank is a perfect SIP stock. We are buying into a strong compounding stock at the lower
end of its historic valuations. Hence, the Bank’s inherent +20% profit growth along with scope for
valuation expansion will lead to strong returns for its long term shareholders. In short - KVB stock will be
able to give >2X returns, compared to what the Bank gives for its FD Holders. Accumulate the stock and
just look at the Wealth creation that happens in the next few years.


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Karur Vysya Bank - Multibagger Stock Pick

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