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Sunday, Dec 22, 2002

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Karur Vysya Bank: Subscribe

Suresh Krishnamurthy

INVESTORS are set to reap a profit of around Rs 90 per share by subscribing to the concessionally-priced rights offer of Karur Vysya Bank. The stock price trades above the levels of Rs 150, ex-rights, and the offer is priced at Rs 60 per share. Shareholders also received a 1:1 bonus recently.

As regards the original holding, the decision to hold or sell will depend on the acquisition cost.

If an investor had acquired the shares in recent months prior to the record date for rights and bonus, it may make sense to off-load their original shares now.

That will fetch them short-term capital loss which when set-off against capital gains, if any, would save them tax.

Care must, however, be taken not to off-load shares acquired through the bonus and rights offer within the next 12 months. The tax implications could be severe.

In terms of fundamentals, shareholders can hold on to the stock at present price levels. At a price of Rs 200 or more, investors can off-load the stock. At prices below Rs 150, the stock can be considered for acquisition.

It is true that even at Rs 150, the stock is relatively pricey compared to public sector banking stocks.

The stock's dividend yield based on dividend declared for the year ended March 2002 is less than 2 per cent.

However, Karur Vysya Bank is one of the better performing non-nationalised banks. An element of takeover pricing is expected to remain embedded in the stock's valuation.

Suitability: The stock of Karur Vysya Bank has been more volatile relative to the S&P CNX Nifty Index in recent months. This is because of the concessionally-priced rights offer and bonus offer that attracted buying interest.

However, the stock price volatility can be expected to be higher than that of banking sector majors.

Relatively well-run small non-nationalised banks face intense competitive pressure on profitability and are simultaneously attractive takeover candidates.

These factors will be reflected in higher price volatility. Conservative investors with the ability to hold the stock for a longer-term can still stay with their investment.

Performance: The performance of Karur Vysya Bank in recent quarters has been boosted by the fall in interest rates and the consequent increase in profit from securities trading.

Net interest margin has, however, been falling in the backdrop of rising competition. It is still healthy at above 4 per cent, though.

Operating expenses, on the other hand, is on the high side compared to other well-run banks. The wage burden is comparable to that seen in public sector banks.

However, what would be of more concern is the sharp rise in the proportion of bad loans. Net non-performing assets ratio rose from 3.77 per cent at end-March 2000 to 6.33 per cent at end-March 2002.

Coverage of bad loans through provisions also declined in the year ended March 2002 to less than 50 per cent of net non-performing assets.

The potential of the stock to deliver returns is directly linked to expected improvement in the NPA scenario.

Only such a development would help the bank deal with the intense competition.

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Karur Vysya Bank: Subscribe
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