It was Late Rakesh Jhunjhunwala’s favourite once. Now, India’s largest mutual fund wants a piece of the pie

Karur Vysya Bank has a network of 840 branches, catering primarily to MSMEs

Shares of one of the early purchases and a favourite bank of India’s big bull Late Rakesh Jhunjhunwala, shot up to 4 percent on August 26, as the largest mutual fund in the country got the central bank’s nod to buy 9.99 percent stake in the bank. Apart from the immediate pop in the Karur Vysya bank stock triggered by the news of stake purchase by SBI MF, the bank’s strong financial position and attractive valuation should drive a further re-rating in the stock, analysts say.

Independent market analyst Ambareesh Baliga highlighted that a trusted fund name like that of SBI Mutual Fund lends confidence and credibility to the stock. Karur Vysya has always been seen as a small but well run regional bank. "Given Karur Vysya Bank's strong financial position, SBI MF’s stamp will offer some credibility and trust amongst market participants," he noted.

Yuvraj Choudhary, a research analyst at Anand Rathi Institutional Equities, "Karur Vysya Bank is our top pick amongst peers – it has a better margin profile, strong profitability, and low stress pipeline," Choudhary said. He too described SBI Mutual Fund's stake buy as "incrementally positive."

As of May 31, 2024, SBI Mutual Fund managed assets worth Rs 9.83 lakh crore, spread across 115 mutual fund schemes, with significant allocations in HDFC Bank (8.4 percent), Reliance Industries (6.8 percent), ICICI Bank (6.5 percent), Infosys (3.2 percent), Bharti Airtel (3.3 percent), among others.

ALSO READ: Karur Vysya Bank's Q1 net profit surges 28% to Rs 458.65 crore

Sturdy financials

As one of the oldest private banks in India, Karur Vysya Bank has a network of 840 branches, catering primarily to MSMEs (35 percent of lending), retail (24 percent), and agri customers (18 percent). The bank has made a shift from a traditional bank to digitising its core operations to improve its overall efficiency.

At a time when the banking industry is seeing elevated levels of credit-to-deposit (CD) ratio due to sluggish deposit mobilisation compared to higher credit offtake, Karur Vysya's CD ratio has remained stable versus peers. The bank maintained CD ratio guidance of 85 percent, above peers like DCB Bank (87 percent) and IDFC First Bank (100 percent).

As a result, its margins have improved over the years due to the change in the underlying product mix which is moving toward the retail segment. Its NIM stands at 4.1 percent in Q1FY25, above City Union Bank's 3.5 percent, DCB Bank's 3.4 percent, and Karnataka Bank's 4.1 percent.

Its asset quality also remains robust as the gross non-performing asset (GNPA) or NNPA declined to 1.3 percent/0.4 percent in Q1FY25 from 8.7 percent/3.9 percent in FY20. The improvement in asset quality is supported by loan book diversification, credit approval processes, implementations of remedial actions and enhanced recovery methods.

Currently, 11 brokerage firms are covering the stock, with 10 recommending a 'buy' rating on Karur Vysya Bank and one recommending a 'hold.' At current levels of Rs 224, the stock is trading at 1.69 time FY24 Price-Adjusted Book and FY25 Price to adjusted book of 1.55.

Over the past three months, has risen by over 67 percent, significantly outperforming the Nifty 50's 9 percent gain.

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