Edelweiss Securities has maintained 'Buy' on South Indian Bank with target price of Rs 39 as against current market price Rs 24 in its report.
Commenting on the investment rationale Edelweiss said, ''South Indian Bank (SIB) reported Q4FY15 PAT of Rs 162 million much lower than estimates following one-time staff related expenses and elevated asset quality stress. Staff expenses spiked 28% QoQ, as the bank provided for shortfall in wage revision and higher pension liability (adjusting for discount rate); business momentum remained subdued (loan growth at mere 3% YoY) as it continues to de-bulk its corporate book and moderation in gold loan business; and slippages stood elevated at 1.8% (versus 1.9% in Q3FY15); however, sale to ARCs and higher write-offs pushed GNPLs down to 1.7% (1.8% in Q3FY15).
Given consolidation phase, we expect growth to be slower but expect momentum to build up as retail and SME segments start defining large part of book. Factoring in lower growth and higher credit cost, we prune our FY16E/17E earnings by 16% each. SIB has the potential to generate RoA/RoE of 1.0%/17% by FY17E. Thus, valuation of 0.7x FY17E ABV looks attractive and adequately captures the risks leaving limited downside.
We expect it to deliver above-average RoA/RoE of 1.0%/17% in FY17E and healthy PAT CAGR of > 50% over FY15-17 (partially a low base effect). At 0.7x FY17E ABV, SIB is an attractively positioned private sector bank. Maintain 'BUY/Sector Performer' with target price of Rs 39 (earlier Rs 45).''
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