Accumulate Karnataka Bank; target of Rs 136: Arihant Capital

Arihant Capital's research report on Karnataka Bank

Karnataka Bank’s Q3FY19 profitability has substantially improved largely due to higher other income growth of 55% YoY. It has reported PAT of Rs 140 cr in Q3FY19 vs Rs. 87 cr in the corresponding quarter of last fiscal year. On a QoQ basis, the net profit grew by 26%. Operating profit for the quarter stood at Rs. 400 cr registering a growth of 24% YoY. NII for the quarter grew by 8% YoY at Rs. 488 cr vs Rs. 451 cr. To cushion itself from increasing employee cost, the bank made a provision of Rs. 29 cr related to superannuation. In addition to this, the bank also provided for wage revision, which has led to jump in employee costs.

Outlook

At CMP of Rs 119, the stock is trading at 4.2x P/E and 0.79x P/ABV to its FY20E EPS of Rs 25.4 and Rs 151 BV per share respectively. We have revised FY20E credit growth rate of the bank to 18% from 15% earlier and valued the stock at 0.9x to its FY20E P/ABV which yields a target price of Rs. 136 per share giving an upside potential of 14%. We have an ‘Accumulate’ rating for the stock.