by Equinomics
Research & Advisory Private Ltd
BUY Recommendation on
Andhra Bank (ABL)
Due to slower
economic growth and regional worries (impacted the financials during the year)
bank has seen weak asset quality in its books. With scaling up of business,
returning to profitability and improvement asset quality coupled with higher
return ratio, Equinomics Research expect the stock to command higher multiple
going forward. At the CMP of Rs. 84 stock trades at 0.67x FY2016E adjusted book
value (ABV) of Rs.125.
Equinomics
Researchfirmly believe that the reversal of NPA cycle started in Q4FY2014 would
continue in the current fiscal as well. Anticipated economic recovery as well
would augur well for the banking stocks including the PSU banks. Among several
PSU banks we like Andhra Bank.
The rational are:
The PSU banks largely
sold a lot of their NPAs in FY2014 to ARCs (Asset Re-construction Companies) –
their total sale to ARCs in FY2014 was to the tune of Rs.50,000 crore and it is
expected that it would about Rs.80,000 crore in FY2015. This move temporarily
reduces outstanding NPAs but in the long term they may have to incur the burden
as the ARCs may not succeed in recovering all outstanding NPAs.
However, the
management of Andhra Bank has indicated that they haven’t sold any asset to
ARCs in FY2014. Hence, its reported asset quality is relatively more reliable.
This unique strategy of the bank has given us a lot more comfort on this PSU
bank;
The management has
indicated that it would reduce the Gross NPA to 4% in Q1FY2015 from 5.7% in
Q4FY2014 – considering its conservative strategy of not resorting to sale to
ARCs to report lower NPAs in FY2014; we firmly believe that this bank can
achieve this target. In FY2014, the bank has registered a poor credit growth of
9% and its consolidated net profit dipped by 66% to Rs.440 crore. Net interest
income remained flat at Rs.3,839 crore, while non-interest income increased by
30% to Rs.2,036 cr in FY14. However, we expect its credit growth and profits to
improve to improve going forward for two reasons:
· This
bank draws about 52% of business from the state of Andhra Pradesh – we firmly
believe that the new political leaderships in both Telengana and Andhra Pradesh
are highly conducive for accelerating growth in these two states which would be
highly positive for the bank which has leadership in these two states;
· It is expected to focus more on MSME and
retail segments going forward – in FY2014, ABL registered a strong retail
credit growth of 15.3%, but MSME segment registered a growth of just 9%. However, the share of MSME & retail
together expected to increase to 35% in FY2015 from the current level of 31%;
· On the deposit front bank witnessed a
stronger growth of ~14% during the year due to 11% & 16% growth in CASA
deposits and term deposits YoY respectively. On sequential basis CASA ratio has
improved to 24.8% in Q4FY14 from 23.5%. Going forward, on back of branch
expansion (plans to add 450 branches in FY2015) we expect bank to improve its
CASA ratio to 25.5% in FY2015. Also the CASA ratio improvement to support NIMs.
During the quarter NIMs improved by 11 bps to 2.65% in Q4FY14.
Bank is expanding its
branch network significantly by 450 branches in FY2015, which would help to
improve its CASA ratio. At the CMP of Rs. 84 stock trades at 0.67x FY2016E
adjusted book value (ABV) of Rs.125.
We expect return
ratios to improve from hereon for the bank i.e. RoE to reach to 11% in FY15E
from 5.2% in FY14. The stock price hit as high as Rs.190 in October 2010, now
it trades at Rs.84. Considering its estimated adjusted book value of Rs.125 for
FY2015 and our conviction that its valuation multiple would improve at least to
1x its adjusted book value, we arrive at a target price of Rs.125/ which is a
return of about 49% with an investment perspective of one year. Hence, we
initiate a BUY recommendation on the stock.
Disclosure: I,
G.Chokkalingam, do not hold the shares of Andhra Bank directly or indirectly
through friends, relatives or any proxies;
Equinomics Research
& Advisory Private Ltd
Investment Adviser
SEBI REG. NO.
INA000001712
G. Chokkalingam -
Founder & Managing Director
18 - A/3, Ekta CHS,
Shivdham Complex, Opposite Fire Brigade,
Near Oberoi Mall,
Malad (East), Mumbai - 400097
Ph: +91 22 28492942 |
Email: chokka.g@equinomics.in
Head Office – Mumbai
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