October 1, 2010

BANKING
COMPANY UPDATE

Institutional Equities Andhra Bank (Rs160)

Buy
India Research Target Price: Rs266

Stock Data Quality franchise at attractive valuation

Bloomberg Code ANDB.IN
Andhra bank posted quality volume growth in total business of 26.5% (CAGR in
Market Cap. (Rs bn / US$ bn) 77.6/1.7 FY08-10) with improvement in margin on the back of lesser liability costs and
reported further improvement in asset quality. Going forward in FY10-12, we
52-week High/Low (Rs) 170/95
expect compounded growth of 21.5% in business with slight improvement in
Shares Outstanding (mn) 485 margin to 2.96% in FY12 from 2.84% in FY10 mainly driven by faster re-pricing
of assets. We estimate the bank's return ratios to remain robust; traction in
Avg. daily volume ('000) 1,459
return on assets would come from higher margin, operating cost efficiency and
Avg. daily value (Rs mn) 170 lesser credit cost though much lower treasury gains would dent the profitability.
We estimate that in FY12, the bank would report RoAA and RoAE of 1.21% and
Promoter holding (%) 51.6
24.9% respectively. We maintain our earning estimates for FY11 and FY12 and
Free float (%) 48.4 reiterate our BUY rating with a price target of Rs266 at 2.1x adjusted book
value FY12.
FII holding (%) 14.1
• Strong volume growth: We expect credit book expansion would mainly be
driven by SME, retail and agriculture sectors. In recent past, growth in SME
Relative Performance sector came from across segments particularly from rice mills, iron &
steel and textile industries. The bank's retail loans composition is still
80
contained at 15.5% and it is expected that the bank would further increase
60 exposure to the sector; under the sector, high-yielding non-agriculture gold
40 loans reported robust growth of three times to Rs13.8 bn. Going forward,
the bank's management expects strong growth in the sub-segment to
20
continue.
0

(20) (Rs mn) FY2008 FY2009 FY2010 FY2011E FY2012E

30-Sep-09 31-Mar-10 30-Sep-10 Total Net Income 19,660 23,923 31,594 36,865 44,533
Andhra Bank BSE-Sensex Profit before provisions 10,600 12,880 18,098 21,180 25,963
NIM (%) 2.7 2.7 2.8 2.9 3.0
Net Profit 5,786 6,531 10,459 11,658 14,396
BSE Sensex 20,069
EPS (Rs) 12 13 22 24 30
EPS Growth (%) 8 13 60 11 23
P/E (x) 13.4 11.9 7.4 6.7 5.4
Price/Book Value (x) 2.4 2.1 1.8 1.5 1.2
Price/Adjusted Book Value (x) 2.4 2.2 1.8 1.5 1.3
Dividend Yield (%) 2.5 2.8 3.1 3.6 4.1
Cost-to-income (%) 46.1 46.2 42.7 42.5 41.7
ROA (%) 1.1 1.0 1.3 1.2 1.2
ROE (%) 18.1 18.9 26.0 24.1 24.9
Rakesh Kumar
Tier-1 Capital (%) 8.5 8.7 8.2 7.9 7.7
rakesh.kumar@karvy.com
+91-22-22895028 Source: Company & Karvy Institutional Research

Karvy Institutional Equities • 2nd Floor, Regent Chambers, Nariman Point - Mumbai 400 021 • +91-22-2289 5000.

For Private Circulation only. For important information about Karvys’ rating system and other disclosures refer to the end of this material.
Karvy Stock Broking Research is also available on: Bloomberg - KRVY <GO>, Thomson Publisher & Reuters.
 October 1, 2010

Institutional Equities Andhra Bank

• Expansion in margin: The bank's margin is expected to expand on the back of faster
re-pricing of assets. On asset-liability maturity analysis, almost 40% of the bank's
advances and 60% of deposits would come for re-pricing in a year time horizon.
The bank's 70% of deposits come from retail and whole-sale term deposits and rest
from CASA deposits. Almost 60% of the total term deposits (42% of aggregate
deposits) could come for re-pricing in a year time. On credit book side, almost 65-
70% of advances are on floating rate basis; on 2nd August'10 the bank increased
its BPLR by 50 bps to 12.5%. Fresh advances disbursed on base rate system would
be re-priced with a time lag. In increasing interest rate scenario, higher proportion
of advances would come for re-pricing since almost 65-70% of advances are based
floating rate leading to improvement in margin.
• The bank's fee based income would gather pace on the back of higher credit
processing volume, demand for non-fund based products from corporate and
traction in insurance venture income.
• The bank's management does not expect any major strain on asset quality going
forward; as on end-June'10, the bank had gross NPA and net NPA of 1.01% and
0.30% respectively with provision coverage of 86% (including technical write-offs)
and 71% (excluding technical write-offs).
We maintain our earning estimates for FY11 and FY12 and reiterate our BUY rating with
a price target of Rs266 at 2.1x adjusted book value FY12. At current price, the stock
trades at 1.26x ABV FY12.

2
 Institutional Equities

Stock Ratings Absolute Returns

Buy : > 25%
Out Performer : 16 - 25%
Market Performer : 0 - 15%
Under Performer : < 0%
Sell : <(25%)

Hemindra Hazari
(Head of Research)
hemindra.hazari@karvy.com

For further enquiries please contact:

research@karvy.com
Tel: +91-22-22895000

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