Fwd: South Indian Bk-Undervalued on FY11e EPS of Rs 24 & FY12e EPS of Rs 29 (Edel)

 

 

South Indian Bank (SOUIND) business
growth continued to show strong traction, with advances growth at ~36% Y-o-Y
and 4% Q-o-Q, to Rs. 167 bn in Q1FY11. Gold loans, which constitute a bulk of
the bank's loan book (17% of advances), continued to witness strong traction
during the quarter. The loan book is expected to grow at 25% (CAGR) over the
next two years through network expansion and increased penetration.
Over the past few
quarters, SOUIND has posted stable margins while balance sheet growth has
continued to be resilient with low restructuring, lower slippages, and strong
provision coverage ratio. With robust asset quality, we believe the bank is
well positioned to play the up cycle in growth. 
On our FY11E and FY12E EPS
estimate of Rs. 24.0 and Rs. 29.4, the stock is currently trading at a P/E of
8.5x and P/ABV of 1.4x on FY11E basis and at a P/E of 6.9x and P/ABV of 1.2x on
FY12E basis. Given these attractive valuations and its growth prospects, we
believe the stock offers upside potential in the near term.
SOUIND
generates decent margins of ~2.8% on the back of its structurally strong
deposit franchise. Around 32% of its deposits comprise low-cost current account
and savings account (CASA)
deposits & non-residential external (NRE) deposits, which collectively
enable the bank to contain its deposit costs. SOUIND has robust asset quality,
with gross NPA at 1.33%, net NPA at 0.37% & provision coverage at 71%.
 The
new management's efforts at improving the bank's operating performance are visible
with improvement in return on assets (RoA) to 1% in FY09 from 0.1% in FY05.
Over the past four years, the bank has achieved considerable progress in terms
of bringing profitability focus among branches, re-energizing employees,
improving asset quality, and creating greater brand awareness and technology
coverage. We believe the present management is innovative and dynamic, and so
far superior to other regional banks' management.
South Indian Bank is one of the best
regional-based private banks in the country. We like the bank for its strong
regional presence, good technology network, improving asset quality and
possible M&A play. We expect net revenues and profits from FY09-11E to grow
at 2 year CAGR of ~19% respectively.

Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.