Buy Syndicate Bank; target Rs 122: Dolat Capital

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Buy Syndicate Bank; target Rs 122: Dolat Capital

Dolat Capital is bullish on Syndicate Bank and has recommended buy rating on the stock with a target of Rs 122 in its December 28, 2011 research report.

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Dolat Capital is bullish on Syndicate Bank and has recommended buy rating on the stock with a target of Rs 122 in its December 28, 2011 research report.

"Syndicate Bank corrected sharply by almost 20% in recent sessions primarily led by concerns over deterioration in asset quality. In line with these concerns, we have also reduced our earnings estimates by 6.5% and 16% for FY12 and FY13 respectively. Accordingly we have also reduced our target price by 18% to Rs 122 at 0.9x ABV FY13. However, we also believe that the current valuations (stock price) is reflecting a collapse of profitablity and return ratios, which we find too pessimistic. Our reverse calculations suggest that the market is building in RoAA and RoAE of 0.3-0.35% and 8.5-9.5% respectively. This appears extremely unlikely to us even in the most pessimistic scenarios. Even in the worst of the times over the last decade, the bank always reported RoAA of more than 0.6%.

• Credit book expansion much slower than industry in last couple of years, hence we see lower risk verse peers on deterioration of book

• Build-up in gross slippages least among peers in recent quarterly results

• Continuous maintainence or step up in NPL coverage even in most strained times; PCR (including technical write-offs) is relatively higher at 79% among peers

• Deposit rebalancing aiding margin

• Management willing to sacrifice balance-sheet size for quality; foresees bottom-line growth at 25% in FY12. There would be a top management change in February'12, considering the track record of incoming CMD (Mr. M. G. Sanghvi, current ED at Bank of Maharashtra), we believe that the bank's policy of conservatism would continue

• Expectation of capital infusion in FY13 considering lower Tier I

• The stock quotes at historically cheap valuation at 0.6x FY13 ABV with 5.5% dividend yield (on FY12's dividend)

Credit book expansion much slower than industry in last couple of years: Syndicate bank prudently reduced its credit expansion pace from FY10 onwards. The bank also moderated its leveraging of balancesheet on the back of lesser credit book expansion and equity infusion. In the current fiscal year, the bank's management expects credit growth in proximity of 18% YoY.

We estimate that the bank would report RoAA of ~0.75% and RoAE of 18-18.5%. Considering the concern over asset quality, we reduce our earnings estimates for FY12 & FY13 by 6.5% and 16% respectively. We reduce our target price by 18% to Rs 122. We reiterate our Buy rating on the stock with a price target of Rs 122 at 0.9x adjusted book value FY13. At current price, the stock quotes at 0.6x ABV FY13. The stock is available at an attractive dividend yield of 5.5% (on FY12's dividend). At current price, the stock quotes at historically lower valuation.

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