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South Indian Bank

Initiating Coverage

BUY Value in the backwaters


South Indian Bank (SIB) is one of the better-performing old private sector banks. Largely
Price Rs107 concentrated in the semi-urban areas of the Southern states of India, SIB's profitable,
Target Price Rs135 cost-efficient and technologically up-to-date network constitutes a reasonably attractive
standalone franchise. The Bank's Deposit franchise includes a niche NRI customer base that
Investment Period 12 months
contributes a meaningful 17% of deposits and gives it a distinguishing cost advantage over
several of its peers. At the same time, the Bank is trading at the cheapest valuations among
Stock Info peers. At the CMP, the stock is trading at 4.5x FY2011E EPS and 0.7x FY2011E ABV. We
Sector Banking value the stock at 0.9x FY2011E ABV to arrive at a Target Price of Rs135, implying an upside
of 26% from current levels. We Initiate Coverage on the stock with a Buy recommendation.
Market Cap (Rs cr) 1205
„ Cost efficient, Technologically up-to-date network underpins Profitable growth in
Beta 0.6 line with Industry: The Bank's largely semi-urban branch network is concentrated in the
Southern states of the country. While enjoying customer loyalty that comes from years of
52 Week High / Low 123/43 association, the Bank has ensured that it remains sufficiently in step with product, technology
and service level developments in the industry so that its marketshare in not just Deposits and
Avg Daily Volume 89630 Advances, but also CASA Deposits has been maintained over the past ten years. In our view,
the Bank's cost-efficient and technologically up-to-date network constitutes a reasonably
Face Value (Rs) 10
attractive standalone franchise that is expected to underpin the Bank's profitable growth above
its peer group average.
BSE Sensex 15,378
„ Niche NRI Deposit base underpins deposit cost advantage over several peers: The
Nifty 4,569 Bank's deposit franchise includes a niche NRI customer base that contributes a meaningful
17% of total deposits and gives it a distinguishing cost advantage over several of its peers.
Moreover, the environment has become more conducive for inflow of NRE Deposits at cheap
BSE Code 532218
rates. Increasing tie-ups with Middle-Eastern Forex houses are also expected to help the
NSE Code SOUTHBANK Bank garner reasonable share of incremental flows. Together with a fall in bulk deposit rates,
we believe the Bank will be in a position to largely maintain its NIMs at around 2.8% in FY2010E.
Reuters Code SIBK.BO „ Available at attractive valuations: While the Bank's core Profitability and growth outlook
are above average compared to peers, it is trading at the cheapest valuations. The Bank's
Bloomberg Code SIB@IN
current valuations at 0.7x FY2011E ABV represents almost a 25% discount to the average
multiple at which its peer group is trading. The Bank's healthy standalone Return Ratios, niche
Shareholding Pattern (%) South-based and NRI franchise and likelihood of Book and EPS accretion for potential acquirers
also makes it an attractive merger candidate in our view.
Promoters -
Key Financials
MF / Banks / Indian FIs 20.2 Y/E March (Rs cr) FY2008 FY2009 FY2010E FY2011E

FII / NRIs / OCBs 36.2 NII 394 523 611 705


% chg 7.2 32.7 16.9 15.4
Indian Public / Others 43.6
Net Profit 152 195 229 268
% chg 45.6 28.7 17.6 16.8
Abs. 3m 1yr 3yr
NIM (%) 2.6 2.9 2.8 2.8
Sensex (%) 37.7 4.1 50.5
EPS (Rs) 16.8 17.3 20.3 23.7
SIB (%) 71.8 18.9 121.3 P/E (x) 6.4 6.2 5.3 4.5
P/BV (x) 0.8 0.9 0.8 0.7
Vaibhav Agrawal P/ABV (x) 0.8 1.0 0.8 0.7
Tel: 022 - 4040 3800 Ext: 333 RoA (%) 1.0 1.0 1.0 1.0
E-mail: vaibhav.agrawal@angeltrade.com RoE (%) 16.4 15.9 16.3 16.6
Source: Company, Angel Research

January
July 24, 2009
30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 1
South Indian Bank
Banking

Company Background
SIB is one of the oldest banks in South India, based out of Thrissur, Kerala. The Bank mainly
extends traditional banking services to its largely middle-income, semi-urban and urban clientele.
FII and domestic institutional holding in the Bank is at a high 36% and 12%, respectively. Notably,
the Bank has no identifiable promoter. SIB is helmed by Dr V A Joseph, who was earlier part of
Syndicate Bank's top management and under whose leadership SIB has seen creditable
improvement in its financial performance over the past two years.

Exhibit 1: Shareholding Pattern

13%

50%

36%

MF/Banks/Indian FIs FII/ NRIs/ OCBs Indian Public

Source: Angel Research

The Bank has around 4,600 employees and a network of 544 branches, 9 extension counters and
295 ATMs, with 91% of the branches concentrated in South India. Around 44% of the Bank's
branches are located in the semi-urban regions while 21% are located in the urban areas.

Exhibit 2: Branch Distribution


100%
16% Metro

80%
21% Urban

60%
91% South

40% 44% Semi-urban

20%

19% Rural
9% North
0%

Source: Company, Angel Research

Corporate credit accounts for the largest portion of SIB's credit mix at 46%, followed by SME at
19% and Retail Credit at 24%.

July
January
24, 2009
30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 2
South Indian Bank
Banking

Exhibit 3: Credit Mix (comparison with a cross-section of banks)


100% 1
-
7 9 10
13 16
13 10 21
7 15
80% 8
6
64
60% 34
51 50 56 43
50
40%

29
20% 20 16 11 19
35 15
10 14 15 13 12 8
0% -
AXSB UNBK INDBK YESBK SIB FEDBK KNTBK

Agri SME Corporate Retail - Hsg Retail - Other


Source: Company, Angel Research. Note: AXSB - Axis Bank, UNBK - Union Bank of India, INDBK - Indian Bank,
YESBK - Yes Bank, FEDBK - Federal Bank, KNTBK - Karnataka Bank

CASA Deposits constitute 24% of SIB's total deposits while Retail FDs constitute 46%. NRI Deposits
account for a significant 17% of the Bank's total deposits.

Exhibit 4: Deposit Mix (comparison with a cross-section of banks)


100%
11 13 6
18
25
80% 43

60% 59 56 79
76
59
14 51
40%
22
20% 21 24 12 19 20
21 2 14
9 7 5 4 4
0% 7
AXSB UNBK INDBK YESBK SIB FEDBK KNTBK

Current Savings Other Retail FDs Bulk deposits

Source: Company, Angel Research

January
July 24, 2009
30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 3
South Indian Bank
Banking

Industry Outlook - Banking on Revival


Concerns over Asset quality and slowing Credit demand are now receding

Concerns over Asset quality and slowing Credit growth, that were a major overhang over both the
Private and PSU Bank stocks, are now receding as the GDP growth outlook continues to improve.
We maintain our view that Monetary softening, strong Domestic Savings and falling Interest rates
will help revive domestic demand from late FY2010E and subscribe to the view that stimulus
packages and bank bailouts will continue to stabilise developed economies over a similar timeframe.
With capital markets reviving and equity issuances on the rise, aided further by internal generation,
leverage levels should also come down over the next 9-12 months, even as domestic demand
picks up. This should help create a base for revival in credit demand 2HFY2010E onwards. Overall,
given the reasonable mid-cycle valuations, we believe a longer term investment perspective needs
to be adopted to take advantage of the imminent upturn in GDP growth.

RBI's OMOs should keep Interest rates low

The central government's fiscal deficit estimate for FY2010E has been increased to 6.8% of GDP,
while the ceiling for overall state government fiscal deficit has been increased to 4%. This further
increase in fiscal deficit could be a short-term overhang for the Banking Sector. However, we see
this as an opportunity to invest in bank stocks, as interest rates are unlikely to go up, given our
strong domestic savings and RBI's liquidity infusions that amount to indirect monetisation of the
deficit (the RBI is doing this through a huge Rs80,000cr of Open Market Operations, planned in
the first half of this fiscal. Notably, post the recent Union Budget, indications from the government
are that this indirect financing by the RBI could be stepped up to Rs2lakh cr).

Banking Sector amongst biggest beneficiaries of reviving GDP growth

With GDP growth reviving, the banking sector will be amongst the biggest beneficiaries. As low
lending rates work through the system for a few quarters, we believe a base will be created for
revival of Retail credit demand and gradually capex demand, even though a perceptible trend
reversal in overall credit growth is likely to occur only in FY2011E.

July
January
24, 2009
30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 4
South Indian Bank
Banking

Investment Arguments
Cost efficient, Technologically up-to-date network underpins Profitable growth
in line with Industry

Marketshare has been maintained over the past ten years

SIB's largely semi-urban branch network is concentrated in the Southern states of India. While
enjoying customer loyalty spanning many years, the Bank has ensured that it remains sufficiently
in step with product, technology and service level developments in the industry. As a result, the
Bank has maintained its marketshare in not just Advances and Deposits, but also CASA Deposits
over the past ten years. The Bank was one of the first amongst its peers to have its network on the
Core Banking platform and presently offers its clients standard products and channel options,
including net banking, etc.

Creditably, the Bank has


Exhibit 5: Marketshare Trend
maintained marketshare even %

in CASA Deposits over the 1.00

past ten years


0.80

0.60

0.40

0.20

-
FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010E FY2011E

Advances Deposits CASA Deposits

Source: Company, Angel Research

Operating efficiency has improved aided by early tech adoption

In line with industry trends, the Bank has substantially improved its operating efficiency aided by
technology and natural operating leverage. As a result, SIB's operating expenses, as a % of
assets, are low which has helped it maintain reasonable Return on Assets (RoA). Although, the
Bank has further scope for operating leverage, we do not expect it to be higher than its private and
PSU peers. Consequently, in line with our industry view, we do not expect further operating
leverage to accrue to the Bank at the RoA level, since industry-wide improvements have been
usually passed on.

Incidentally, the Bank incurred certain one-time Staff expenses in FY2009 that resulted in its Staff
cost increasing by 46% yoy (further exacerbated by provisions for imminent wage hikes). While
SIB has made further provisions for wage hikes up to 17% of wages in 1QFY2010, based on our
discussion with management, we expect overall growth in the Bank's Staff expenses to be limited
to around 5% in FY2010E.

January
July 24, 2009
30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 5
South Indian Bank
Banking

Steady branch expansion strategy in place

45 branches to be opened in Management also indicated that it intends to open around 45 branches in FY2010E as a part of its
FY2010E, 250 over next four plans to open a total of around 250 branches over the next four years. About 150 of these branches
years are intended to be opened outside South India, where the Bank's strategy is to have a presence in
key centers, partly to widen its customer base as well as meet the requirements of its existing
clients. This is in keeping with the Bank's strategy to plug all gaps in its offerings. At the same time,
the management intends to keep a tight leash on incremental expenses by avoiding very expensive
locations for its new branches. Thus, while in the medium term, structural competition from newer
private banks could become increasingly challenging, SIB's overall strategy and execution has
been creditable in the past few years and the management's enunciated strategy continues to be
credible and reasonable, underpinning our positive outlook in the medium term.

Niche NRI Deposit base underpins Deposit cost advantage over several peers
Outsized NRE Deposit The Bank's Deposit franchise includes a niche NRI customer base that contributes a meaningful
marketshare of 3.2% 17% of its total deposits and gives it a distinguishing cost advantage over several of its peers. The
Bank's marketshare in NRE Deposits stands at about 3.2% (marketshare with respect to overall
NRI Deposits stands at about 1.9%). This is significantly higher than the Bank's overall marketshare
of 0.4% of total deposits. The cost of NRE Deposits, which is about 3.5-4% at present, puts these
deposits just a notch above CASA Deposits that have a blended cost of 2-2.5%.

NRE deposit base a significant cost advantage

Fall in wholesale deposit rates The NRE deposit base puts the quality of the Bank's deposit mix above that of several other
to further aid NIMs mid-sized PSU and Private banks. However, till recently the high component of bulk deposits (at
about 18-20% of overall deposits) was putting pressure on the Bank's overall cost of funds. But
now, wholesale deposit rates have declined sharply. As a result, we believe that the Bank will be in
a position to largely maintain its NIMs in FY2010E at about 2.8% notwithstanding structural
competitive pressures for most mid-sized banks like itself over the medium term.

Exhibit 6: Competitive cost of funds


%

8.0

7.5

7.0

6.5

6.0
7.5
5.5 6.9
6.5
6.2
5.0 5.8 5.7 5.6
5.5
4.5

4.0
AXSB UNBK INDBK YESBK SIB FEDBK KNTBK KVB

Interest Expenses as % of average assets (FY2009)

Source: Company, Angel Research. Note: AXSB - Axis Bank, UNBK - Union Bank of India, INDBK - Indian Bank,
YESBK - Yes Bank, SIB - South Indian Bank, FEDBK - Federal Bank, KNTBK - Karnataka Bank, KVB - Karur Vysya
Bank

July
January
24, 2009
30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 6
South Indian Bank
Banking

Environment has turned conducive for cheap NRE deposit inflows recently

Moreover, the environment has become meaningfully more conducive for NRE deposits. The
RBI-mandated maximum spread to LIBOR permitted for NRE deposits stands at a high of 175bp
and is unlikely to be brought down for the time being considering that overall forex inflows into the
country remains subdued. The LIBOR itself is at very low levels of 1-2% due to the substantial
global liquidity created by major central banks such as the US Federal Reserve. Moreover, the
outlook on the Rupee exchange rate is also benign in the near term, creating the incentive of
further upside on NRE deposits through Rupee appreciation.

Exhibit 7: Healthy inflow of NRE Deposits expected in ensuing quarters


Healthy NRI inflows in 4QFY09 (and going forward), aided by near- term outlook
% Rs cr
of rupee appreciation, even as spread to LIBOR is high. At the same
9.0 time, plummeted LIBOR to ensure low cost for domestic banks 12,000

6.0 8,000

3.0 4,000

- -

(3.0) (4,000)

(6.0) (8,000)

(9.0) (12,000)
Sep-04

Sep-05

Sep-06

Sep-07

Sep-08
Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09
NRI Deposits Inflow / Outflow NRE FD Ceiling Rates QoQ Exchange rate variance

Source: RBI, Bloomberg, Angel Research

Huge NRI deposit inflows in 4QFY2009

In 4QFY2009 alone, the quantum of inflows in the form NRI deposits was a huge Rs10,826cr,
much above the average level of Rs3,200cr in the preceding three quarters and a paltry Rs706cr
of total NRI inflows in FY2008. It should be noted that a good chunk of this was attributable to
terminal inflows ie. money being brought back into the country by returning expatriates who lost
their jobs as a fall-out of the ongoing global crisis (about 1.5 lakh individuals are estimated to have
returned to India in 4QFY2009).

SIB to benefit moderately

Our discussion with management about the profile of its NRI customer base indicates that its
typical NRI customers belong to the Middle-Income Segment, working in the Middle-East and
having a family back home, usually in the semi-urban areas of the Southern states where the
Bank has most of its branches. Having had long-lasting ties with the Bank, there is usually a
substantial sense of customer loyalty from them. Typically, customers remit money to India either
for their families or because they feel more comfortable about the safety of their wealth saved in
Indian Rupees, since they eventually want to return back to the country. That is to say, a good
majority of the Bank's customers may not necessarily be very sensitive to near-term increase in
spreads or improvement in exchange rate outlook. Also, given the higher rates available on domestic
deposits (NRO accounts for NRIs), the Bank has seen a good chunk of NRI deposit inflows moving
into NRO accounts.

January
July 24, 2009
30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 7
South Indian Bank
Banking

Tie-ups with 24 Middle-Eastern exchange houses to help

Having said that, the fact remains that the outlook for NRE inflows has improved and given the
Bank's substantial marketshare in this Segment, it is likely to receive a reasonable share of these
inflows. Added to its existing customer base in this Segment, the increasing tie-ups with
Middle-Eastern exchange houses are also expected to help the Bank garner a reasonable share
of incremental inflows. Under these tie-ups, the Bank deputes 8-10 members of its staff for
undertaking complete management of these exchange houses. This gives the Bank front-end
access to new NRI customers to whom its staff can cross-sell the Bank's deposit products. The
Bank added a few thousand customers through this route in FY2009. The Bank has also entered
into tie-ups with other financial services companies such as Geojit Securities to offer a wider
bouquet of services to its NRI customer base.

Financial Analysis
Growth in line with industry

Low cost of funds due to NRE We rate the Bank's peer group (ie. old private sector banks) on an average, broadly on par with
deposits aid healthy NII growth mid-sized PSU banks in terms of RoE and growth potential. Specifically, in case of SIB, as described
outlook earlier, it has done a creditable job of maintaining its marketshare in Deposits and Advances over
the past ten years. Moreover, its low-cost NRI deposit base gives it a cost advantage over several
peers. While it's overall cost of funds is not significantly lower, this is mainly because of high bulk
deposits that are now likely to get priced downwards. However, we have not factored in improvement
in NIMs above 2.8% delivered in FY2009, in line with our view that smaller banks have consistently
passed on any benefits from cost improvements to customers to ward off stiff competition from
new private banks. This coincides with our estimated 17% CAGR in the Bank's Balance Sheet
over FY2009-11E that implies marketshare being largely maintained over this period.

Fee Income low; however, overall a Profitable standalone franchise

The Bank's funding cost advantage, to an extent, is eroded by its lower core Fee Income compared
to peers. The Bank's Fee Income is lower than industry averages partially due to the limited
opportunities to extend Fee Income services, especially in the newer segments, due to the typical
profile of the Bank's customer base. Management stated its charges for the traditional Fee Income
streams are on par with competition.

Exhibit 8: Low Fee Income


%

2.50
-
0.05
0.22
2.00 0.01
0.67
0.28
- -
1.50 0.49
0.59
0.36 0.91
0.24
0.07
1.00 0.10 0.25 0.50 0.24 0.12
1.69 0.14
0.36
0.14
0.41 0.19 0.42
- 0.14
0.50 0.24 0.89
0.27
0.14 0.70 0.14
0.13 0.49
0.34 0.30 0.28
0.15
-
AXSB UNBK INDBK YESBK SIB FEDBK KNTBK KVB

CEB Forex Other Treasury Recoveries

Source: Company, Angel Research

July
January
24, 2009
30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 8
South Indian Bank
Banking

Keeping in mind the Bank's typical customer base, general trends in its peer group and
management's outlook on Fee Income, we have not factored in any improvement in Fee income
as a percentage of average assets ie. we expect Fee income (mainly from traditional sources) to
continue growing more or less in line with Balance Sheet growth. That said, upsides to Profitability
could accrue from economies of cross-sell, which potential acquirers with a wider and more
established product and service range can leverage more effectively. In any case, in our view, the
Bank's cost-efficient and technologically up-to-date network constitutes a reasonably attractive
and profitable standalone franchise as well.

Opex costs, as % of average assets, to fall in FY2010E

We expect the Bank's Operating expenses to post a sedate 10% CAGR over FY2009-11E, mainly
due to a higher base of Staff expenses in FY2009 on account of one-time expenses (over and
above wage hike provisions). As a result, Opex, as a percentage of average assets, is expected to
fall in FY2010E back to FY2008 levels of 1.6%.

Low provisioning costs appear unsustainable

We have factored 10bp Incidentally, the Bank's provisioning expenses have declined significantly over FY2008-09, which
increase in NPA provisioning we believe is unsustainable. Accordingly, we have factored in a 10bp fall in NIMs adjusted for
costs by FY2011E provisioning expenses over FY2009-11E. Further downsides on this front represent a key investment
risk. The Bank's SLR book is largely de-risked, with only 16% of SLR investments in the AFS
portfolio, having a low duration of 0.7 years. The non-SLR book however, comprises a large 34%
of overall investments.

SIB should be able to sustain 14-16% normalised RoEs

We believe the Bank will be able to sustain RoAs at around 1% levels over FY2009-11E,
notwithstanding structural competitive pressures from new private banks. In line with peers, the
Bank has a high Tier 1 ratio of 13.2% (as per Basel 2 norms) and management has indicated that
it is comfortable with a Tier 1 ratio of 10% on the lower side (as against 7-8% for PSU and new
Private Banks due to their ability to raise cheaper bond capital). Accordingly, we believe that the
Bank's normalised core RoEs would remain in the range of 14-16% over the medium term (with a
downward bias on account of competitive pressures). We expect SIB's RoEs to average around
16% over FY2009-11E and expect Net Profit to post 17% CAGR over the mentioned period.

January
July 24, 2009
30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 9
South Indian Bank
Banking

Exhibit 9: DuPont Analysis


FY2007 FY2008 FY2009 FY2010E FY2011E Co Avg Peer Avg
(FY07-09) (FY07-09)
YoA 7.98 8.52 9.00 8.87 8.90 8.50 8.51
(-) Prov. Exp. 1.01 0.37 0.30 0.32 0.33 0.56 0.63
Adj YoA 6.97 8.15 8.70 8.55 8.57 7.94 7.88
CoA 4.98 5.95 6.21 6.11 6.17 5.71 5.74
NII 3.00 2.56 2.79 2.76 2.74 2.79 2.77
Adj NII 1.99 2.19 2.49 2.45 2.41 2.22 2.14
Treasury 0.26 0.21 0.19 0.09 0.02 0.22 0.21
Int. Sens. Inc. 2.25 2.40 2.67 2.54 2.43 2.44 2.35
Other Inc. 0.73 0.72 0.69 0.68 0.69 0.72 1.18
Op. Inc. 2.98 3.12 3.36 3.22 3.12 3.16 3.53
Opex 1.79 1.61 1.75 1.61 1.55 1.72 2.09
PBT 1.20 1.51 1.61 1.61 1.58 1.44 1.44
Tax 0.35 0.52 0.57 0.57 0.54 0.48 0.42
RoA 0.85 0.99 1.04 1.04 1.04 0.96 1.02
Leverage 18.19 16.64 15.22 15.66 15.99 16.68 16.52
RoE 15.48 16.42 15.85 16.25 16.64 15.92 15.84
Source: Company, Angel Research

Exhibit 10: DuPont Analysis (Peer comparison)


FY2009 SIB FEDBK KNTKBK KVB CUB LVB DHB BOR DCB Average
YoA 9.00 9.33 9.11 9.18 9.96 8.85 8.43 7.72 9.61 9.02
(-) Prov. Exp. 0.30 1.31 0.38 0.55 0.51 0.32 0.14 0.00 1.34 0.54
Adj YoA 8.70 8.02 8.73 8.63 9.45 8.52 8.29 7.72 8.26 8.48
CoA 6.21 5.61 6.85 6.55 6.97 6.96 5.96 5.46 6.42 6.33
NII 2.79 3.72 2.26 2.64 2.99 1.88 2.47 2.26 3.18 2.69
Adj NII 2.49 2.41 1.88 2.09 2.48 1.56 2.33 2.26 1.84 2.15
Treasury 0.19 0.24 0.90 0.59 - 0.04 0.02 - 0.04 0.22
Int. Sens. Inc. 2.67 2.64 2.78 2.68 2.48 1.60 2.34 2.26 1.88 2.37
Other Inc. 0.69 1.21 0.77 1.09 1.53 0.98 1.53 0.67 1.93 1.16
Op. Inc. 3.36 3.85 3.55 3.76 4.01 2.58 3.87 2.93 3.81 3.53
Opex 1.75 1.60 1.64 1.63 1.73 1.87 2.33 1.93 3.71 2.02
PBT 1.61 2.25 1.91 2.13 2.28 0.72 1.53 1.00 0.10 1.50
Taxes 0.57 0.83 0.64 0.61 0.72 0.27 0.38 0.32 (0.00) 0.48
ROA 1.04 1.42 1.27 1.52 1.56 0.44 1.15 0.68 0.10 1.02
Leverage 15.22 8.71 14.43 12.43 13.17 16.82 16.57 30.34 11.42 15.46
RoE 15.85 12.37 18.38 18.90 20.59 7.43 19.06 20.50 1.16 14.91
Source: Company, Angel Research. Note: CUB - City Union Bank, LVB - Lakshmi Vilas Bank, DHB - Dhanalakshmi Bank, BOR - Bank of Rajasthan, DCB -
Development Credit Bank

July
January
24, 2009
30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 10
South Indian Bank
Banking

Exhibit 11: Per Branch Analysis


Company (Rs cr) CA SA CASA TA NII Fee Core Income Opex PAT Mkt Cap
SIB 1.6 6.0 7.6 35.5 0.8 0.2 1.1 0.5 0.3 2.5
FEDBK 2.7 9.1 11.8 58.7 1.6 0.6 2.2 0.8 0.7 7.6
KNTKBK 2.6 6.2 8.8 45.0 1.1 0.4 1.5 0.7 0.6 4.0
KVB 5.3 5.8 11.1 50.5 1.2 0.5 1.7 0.7 0.7 5.7
CRPBK 11.4 9.6 21.0 72.0 1.6 0.6 2.2 1.0 0.8 5.4
INDBK 3.2 10.2 13.4 47.7 1.3 0.6 1.9 0.9 0.7 4.2
IOB 5.1 10.8 15.9 57.3 1.5 0.5 2.0 0.8 0.7 2.7
OBC 5.8 10.5 16.3 68.0 1.3 0.4 1.6 0.8 0.6 3.1
Source: Company, Angel Research. Note: No. of branches are as on FY2007, Balance Sheet / P & L amounts are as on FY2008, Market capitalisation is current

Concerns
Asset quality pressures
Cyclical asset quality The Bank's asset quality has improved substantially FY2002 onwards in line with industry trends
deterioration to continue over underpinned by strong economic growth and improving recovery mechanisms. Especially over
the next few quarters in line FY2006-08, the Bank's gross NPAs fell from 5% to 1.8% while Net NPAs declined from 1.9% to
with industry 0.3%. In 4QFY2010, the Bank had a large technical slippage of Rs100cr that subsequently became
standard in 1QFY2010. Including this technical slippage, the Bank's slippage rate for FY2009 was
1.6%, but excluding this it was around 0.7%, similar to the slippage rate in FY2008. Going forward,
we believe that in line with industry trends, the Bank may also continue to face asset quality
pressures over the next few quarters. However, with the economic outlook improving, we expect
the Bank's asset quality to start stabilising increasingly 2HFY2010E onwards. The Bank’s
Restructured loans at about 20% of its Net Worth are also well below industry averages.

Increase in provisioning costs expected in light of credit mix and deteriorating provision
coverage

Moderate increase in NPA Given the Bank's credit mix that includes a substantial proportion of Personal and SME loans
provisioning costs expected (also reflected in its higher yield on assets), we do not expect the Bank's low NPA provisioning
irrespective of industry cycle costs over FY2008-09 to be sustainable from a structural point-of-view, notwithstanding a cyclical
improvement in industry-wide asset quality outlook. Accordingly, we have factored in an increase
in NPA provisioning costs, as a percentage of average assets, from 0.15% in FY2009 to 0.3% in
FY2011E. This is also taking into account deterioration in the Bank's provision coverage from 82%
in FY2008 to 64% in 1QFY2010 in spite of the above-mentioned technical slippage becoming
standard.

January
July 24, 2009
30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 11
South Indian Bank
Banking

Exhibit 12: Asset quality trend


12.0% 90.0%

10.0% 75.0%
10.1% 10.0%
9.2%
8.0% 60.0%

7.6%
7.1% 6.9%
6.0% 6.6% 45.0%
6.0%
Partly on account of Rs100cr
5.0% of technical slippages that
4.0% 4.5% 30.0%
have become standard in
3.8% 3.9% 1QFY2010

2.0% 15.0%
2.2%
1.9% 1.8% 1.6% 1.3%
1.0% 0.3% 1.1% 0.6% 0.5%
0.0% 0.0%
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E

GNPA % (LHS) NNPA% (LHS) Slippages % (LHS) Provision Coverage (RHS)

Source: Company, Angel Research

Competitive pressures

We expect structural competition from the newer Private Banks to be substantial in the medium
term. However, SIB's overall strategy and execution has been creditable over the past few years,
with the Bank maintaining its marketshare even in CASA deposits. While we expect a loss in
marketshare for the peer group that the Bank belongs to, however, based on the Bank's track
record, and keeping in mind the importance of customer loyalty in the Banking Industry, we expect
the bank to deliver profitable growth above the average growth rate of its peer group over the
medium term.

July
January
24, 2009
30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 12
South Indian Bank
Banking

Outlook and Valuation


Trading at an unjustified discount to peers
25% discount to peer group We rate the Bank's peer group (ie. old Private Banks), on an average, broadly on par with
average unjustified in our view mid-sized PSU Banks in terms of RoE and growth potential. While the Bank's core profitability and
growth outlook are above average compared to its peers, it is trading at the cheapest valuations.
SIB's current valuations at 0.7x FY2011E represents an almost 25% discount to the average
multiple at which its peer group is trading. Specifically, current valuations represent 10-20% discount
to peers such as Karnataka Bank, City Union Bank, Lakshmi Vilas Bank and Bank of Rajasthan,
while in our view, the Bank scores above these banks on core Return and growth parameters.

Median multiples not indicative in light of improved financial performance


Improved operating Current valuations are close to median levels of 0.7x 1-year forward ABV that the Bank has traded
performance can justify at since FY2002. However, since then the Bank's operational and financial performance has
mid-cycle valuations of about improved consistently, including on the Asset quality front. We expect the bank to deliver profitable
1.0-1.2x growth above the average growth rate for its peer group and sustain normalised RoEs at 14-16%
levels, which in our view can justify mid-cycle valuations of 1.0-1.2x 1-year forward ABV.

Attractive merger candidate


Potential for EPS and Book Given that SIB has the potential to deliver healthy Return Ratios close to the Sectoral averages
accretion increase and enjoys a strong niche franchise in the semi-urban areas of South India as well as a niche NRI
attractiveness from M&A customer base, we believe it is an attractive merger candidate. Moreover, keeping in mind the
standpoint Bank's cheap valuations in terms of both P/ABV and P/E, acquisition by larger banks, especially
Private Banks trading between 2.0-3.0x P/ABV, would be accretive for the acquirer, both in terms
of EPS as well as Book Value. However, asset quality concerns in respect of the Bank's existing
credit book as well as its highly dispersed shareholding represent hurdles to any potential acquisition.

Overall, we believe that current valuations provide a reasonable margin of safety from inherent
and cyclical asset quality pressures as well as structural competitive pressures from the larger
Private Banks that are increasingly penetrating deeper into Tier II and Tier III towns. At the CMP,
the stock is trading at 4.5x FY2011E EPS and 0.7x FY2011E ABV. We value the stock at 0.9x
FY2011E ABV to arrive at a Target Price of Rs135, implying an upside of 26%. We Initiate Coverage
on the stock with a Buy recommendation.

January
July 24, 2009
30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 13
South Indian Bank
Banking

Exhibit 13: P/ABV band

250

200

150

100

50

0
Mar-02

Oct-02

Apr-03

Oct-03

Apr-04

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09
Price 0.3x 0.6x 0.9x 1.2x 1.5x
Source: Company, Angel Research

Exhibit 14: Comparative Valuation


Company Reco CMP Target Upside FY2011E FY2011E FY2011E FY2011E EPS FY2011E FY2011E
(Rs) Price (Rs) (%) P/ABV(x) Tgt P/ABV (x) P/E (x) Growth (%) RoA (%) RoE (%)
CRPBK Accumulate 345 361 5 0.8 0.8 4.5 9 0.9 15.6
INDBK Accumulate 144 151 4 0.8 0.9 4.4 10 1.3 19.8
IOB Accumulate 89 93 3 0.7 0.7 3.5 15 0.9 19.4
OBC Accumulate 167 184 10 0.5 0.6 4.2 2 0.7 13.1
YESBK Buy 161 181 13 2.0 2.3 11.5 13 1.3 18.8
SIB Buy 107 135 26 0.7 0.9 4.5 17 1.0 16.6
FEDBK Not Rated 246 - - 0.8 - 6.5 17 1.3 12.9
KNTBK Not Rated 142 - - 0.9 - 7.7 (6) 0.8 12.1
KVB Not Rated 304 - - 0.9 - 6.1 2 1.3 16.5
CUB Not Rated 23 - - 0.8 - 4.7 13 1.4 18.8
Source: Company, Angel Research; Note: Prices are as of July 24, 2009

July
January
24, 2009
30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 14
South Indian Bank
Banking

Profit & Loss Statement Rs crore Key Ratios


Y/E March FY2008 FY2009 FY2010E FY2011E Y/E March FY2008 FY2009 FY2010E FY2011E
Net Interest Income 394 523 611 705 Per Share Data (Rs)
- YoY Growth (%) 7.2 32.7 16.9 15.4 EPS 16.8 17.3 20.3 23.7
Other Income 143 164 171 185 ABVPS ( 75% Coverage) 126.3 110.6 130.7 149.6
- YoY Growth (%) 17.3 15.2 4.1 8.1 DPS 3.0 3.0 3.5 4.0
Operating Income 537 687 782 890 Profitability ratios (%)
- YoY Growth (%) 9.7 28.0 13.8 13.8 NIMs 2.6 2.9 2.8 2.8
Operating Expenses 248 329 357 398 Cost to Income ratio 46.2 47.8 45.6 44.8
- YoY Growth (%) 13.4 32.4 8.6 11.6 RoA 1.0 1.0 1.0 1.0
Pre - Provision Profit 289 359 425 492 RoE 16.4 15.9 16.3 16.6
- YoY Growth (%) 6.8 24.3 18.6 15.6 B/S ratios (%)
Provision and Contingencies 57 57 70 85 CASA ratio 24.1 24.1 23.5 23.1
- YoY Growth (%) -54.0 -0.3 23.9 21.3 Credit/Deposit ratio 69.0 67.1 66.6 68.3
Profit Before Tax 232 302 355 406 Networth/ Assets 16.6 15.2 15.7 16.0
- YoY Growth (%) 58.3 30.3 17.6 14.4 CAR 13.8 14.3 12.7 12.5
Provision for Taxation 80 107 126 138 - Tier I 12.1 12.5 11.1 10.9
- as a % of PBT 34.6 35.4 35.4 34.0 Asset Quality (%)
PAT 152 195 229 268 Gross NPAs 1.8 2.2 1.6 1.3
- YoY Growth (%) 45.6 28.7 17.6 16.8 Net NPAs 0.3 1.1 0.6 0.5
Slippages 0.7 1.6 1.6 1.4
NPA Provisioning exp. / Assets 0.1 0.2 0.3 0.3
Balance Sheet Rs crore NPA Provision Coverage 82.0 48.6 62.9 62.6
Y/E March FY2008 FY2009 FY2010E FY2011E Valuation Ratios
Share Capital 90 113 113 113 PER (x) 6.4 6.2 5.3 4.5
Reserve & Surplus 1,071 1,226 1,409 1,624 P/ABVPS (x) 0.8 1.0 0.8 0.7

Deposits 15,156 18,092 21,168 24,554 Dividend Yield 2.8 2.8 3.3 3.7

- Growth (%) 23.8 19.4 17.0 16.0

Borrowings 28 20 24 28

Tier 2 Capital 155 186 218 252

Other Liabilities & Provisions 590 746 917 1,092

Total Liabilities 17,090 20,383 23,848 27,664

Cash in Hand and with RBI 974 995 1,058 1,228

Bal.with banks & money at call 729 1,305 1,192 1,383

Investments 4,572 5,436 6,927 7,618

Advances 10,454 12,145 14,088 16,765

- Growth (%) 32.0 16.2 16.0 19.0

Fixed Assets 113 130 148 167

Other Assets 249 371 434 504

Total Assets 17,090 20,383 23,848 27,664

- Growth (%) 25.2 19.3 17.0 16.0

January
July 24, 2009
30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 15
South Indian Bank
Banking

Fund Management & Investment Advisory 022 - 3952 4568)


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Ratings (Returns) : Buy (Upside > 15%) Accumulate (Upside upto 15%) Neutral (5 to -5%)
Reduce (Downside upto 15%) Sell (Downside > 15%)

July
January
24, 2009
30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 16
South Indian Bank
Banking
Corporate & Marketing Office : 612, Acme Plaza, M.V. Road, Opp Sangam Cinema, Andheri (E), Mumbai - 400 059 Tel : (022) 3952 7100 / 4000 3600
NRI Helpdesk : e-mail : nri@angeltrade.com Tel : (022) 4000 3622 / 4026 2700
Investment Advisory Helpdesk : e-mail : advisory@angeltrade.com Tel : (022) 3958 4000
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Feedback : e-mail : feedback@angeltrade.com Tel : (022) 2835 5000

Regional Offices:
Ahmedabad - Tel: (079) 3941 3940 Indore - Tel: (0731) 3941 394 Nagpur - Tel: (0712) 3941 394 Rajkot - Tel :(0281) 3941 394

Bengaluru - Tel: (080) 3941 3940 Jaipur - Tel: (0141) 3941 394 Nashik - Tel: (0253) 3941 394 Surat - Tel: (0261) 3941 394

Chennai - Tel: (044) 3941 3940 Kanpur - Tel: (0512) 3941 394 Mumbai (Goregoan) Tel: (022) 2879 0411-15 Visakhapatnam - Tel :(0891) 3941 394

Cochin - Tel: (0484) 3941 394 Kolkata - Tel: (033) 3941 3940 Mumbai (Powai) - Tel: (022)3952 6500

Coimbatore - Tel: (0422) 3941 394 Lucknow - Tel: (0522) 3941 394 New Delhi - Tel: (011) 3941 3940

Hyderabad - Tel: (040) 3941 3940 Ludhiana - Tel: (0161) 3941 394 Pune - Tel: (020) 3941 3940

Private Client Group Offices: Sub - Broker Marketing:


Ahmedabad (C. G. Road) - Tel: (079) 3982 9934 Surat - Tel: (0261) 3071 600 Rajkot (Race course) - Tel: (0281) 2490 847 Powai - Tel: (022) 3952 6500

Branch Offices:
Andheri (Lokhandwala) - Tel: (022) 2639 2626 Ahmeda. (Ramdevnagar) - Tel : (079) 4024 3842 / 43 Jalgaon - Tel: (0257) 2234 832 Pune (Camp) - Tel: (020) 3092 1800

Andheri (W) - Tel: (022) 2635 2345 / 6668 0021 Ahmedabad (Sabarmati) - Tel : (079) 3091 6100 / 01 Jamnagar(Indraprashta) - Tel: (0288) 3941 394 Pune - Tel: (020) 6640 8300 / 3052 3217

Bandra (W) - Tel: (022) 2655 5560 / 70 Ahmedabad (Satellite) - Tel: (079) 4000 1000 Jamnagar (Cross Word) - Tel: (0288) 2751 118 Rajamundhry - Tel: (0883) 3941 394

Bandra (W) - Tel: (022) 6643 2694 - 99 Ahmedabad (Shahibaug) -Tel: (079)3091 6800 / 01 Jamnagar (Moti Khawdi) - Tel: (0288) 2846 026 Rajkot (Ardella) Tel.: (0281) 2926 568

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Borivali (Punjabi Lane) - Tel: (022) 3951 5700. Amritsar - Tel: (0183) 3941 394 Jodhpur - Tel: (0291) 3941 394 / 99280 24321 Rajkot - (Bhakti Nagar) Tel: (0281) 2361 935

Chembur - Tel: (022) 6703 0210 / 11 /12 Anand - Tel : (02692) 398 400 / 3 Junagadh - Tel : (0285) 3941 3940 Rajkot - (Indira circle) Tel : 99258 84848

Chembur - (Basant) - Tel:(022) 022) 6156 1111 / 01 Ankleshwar - Tel: (02646) 398 200 Keshod - Tel: (02871) 234 027 / 233 967 Rajkot (Orbit Plaza) - Tel: (0281) 3983 485

Fort - Tel: (022) 3958 1887 Baroda - Tel: (0265) 2226 103-04 / 6624 280 Kolhapur - Tel: (0231) 6632 000 Rajkot (Pedak Rd) - Tel: (0281) 3985 100

Ghatkopar (E) - Tel: (022) 3955 8400/2510 1525 Baroda (Akota) - Tel: (0265) 2355 258 / 6499 286 Kolkata (N. S. Rd) - Tel: (033) 3982 5050 Rajkot (Ring Road)- Mobile: 99245 99393

Kalbadevi - Tel: (022) 2243 5599 / 2242 5599 Baroda (Manjalpur) - Tel: (0265) 6454280-3 Kolkata (P. A. Shah Rd) - Tel: (033) 3001 5100 Rajkot (Star Chambers) - Tel : (0281)3981 200

Kandivali (W) - Tel: (022) 2867 3800/2867 7032 Bengaluru - Tel: (080) 4072 0800 - 29 Kota - Tel : (0744) 3941 394 Rajkot - (Star Chambers) - Tel : (0281) 2225 401-3

Kandivali - Tel: (022) 4245 1300 Bhavnagar - Tel: (0278) 3941 394 Madurai Tel: (0452) 3941 394 Salem - Tel: (0427) 3941 394

Malad (E) - Tel: (022) 2880 4440 Bhavnagar (Shastrinagar)- Mobile: 92275 32302 Mangalore - Tel: (0824) 3982 140 Secunderabad - Tel : (040) 3093 2600

Malad (Natraj Market) - Tel:(022) 28803453 / 24 Bhopal - Tel :(0755) 3941 394 Mansarovar - Tel:(0141) 3057 700/99836 74600 Surat (Mahidharpura) - Tel: (0261) 3092 900

Masjid Bander - Tel: (022) 2345 5130 /1 / 8 / 42 /28 Bikaner - Tel: (0151) 3941 394 / 98281 03988 Mehsana - Tel: (02762) 645 291 / 92 Surat - (Parle Point) - Tel : (0261) 3091 400

Mulund (W) - Tel: (022) 2562 2282 Chandigarh - Tel: (0172) 3092 700 Mysore - Tel: (0821) 4004 200 - 30 Surat (Ring Road) - Tel : (0261) 3071 600

Nerul - Tel: (022) 2771 9012 - 17 Deesa - Mobile: 97250 01160 Nadiad - Tel : (0268) - 2527 230 / 34 Surendranagar - Tel : (02752) 223305

Powai (E) - Tel: (022) 3952 5887 Erode - Tel: (0424) 3982 600 Nashik - Tel: (0253) 3011 500 / 1 / 11 Udaipur - (0294) 3941 394

Sion - Tel: (022) 3952 7891 Faridabad - Tel: (0129) 3984 000 New Delhi (Bhikaji Cama) - Tel: (011) 41659711 Valsad - Tel - (02632) 645 344 / 45

Thane (W) - Tel: (022) 2539 0786 / 0650 / 1 Gajuwaka - Tel: (0891) 3987 100 - 30 New Delhi (Lawrence Rd.) - Tel: (011) 3262 8699 / 8799 Vapi - Tel: (0260) 3941 394

Vashi - Tel: (022) 2765 4749 / 2251 Gandhinagar - Tel: (079) 4010 1010 - 31 New Delhi (Pitampura) - Tel: (011) 4751 8100 Varachha - (0261) 3091 500

Vile Parle (W) - Tel: (022) 2610 2894 / 95 Gandhidham - Tel: (02836) 237 135 New Delhi (Nehru Place) - Tel: (011) 3982 0900 Varanasi - Tel: (0542) 2221 129, 3058 066

Wadala - Tel: (022) 2414 0607 / 08 Gondal - Tel: (02825) 398 200 New Delhi (Preet Vihar) - Tel: (011) 4310 6400 Vijayawada - Tel :(0866) 3984 600

Agra - Tel: (0562) 4037200 Ghaziabad - Tel: (0120) 3980 800 Noida - Tel : (0120) 4639 900 / 1 / 9 Warangal - Tel: (0870) 3982 200

Ajmer - Tel: (0145) 3941 394 Gurgaon - Tel: (0124) 3050 700 Palanpur - Tel: (02742) 308 060 - 63 Nagaur - Tel: (01582) 244 648

Alwar - Tel: (0144) 3941 394 / 99833 60006 Himatnagar - Tel: (02772) 241 008 / 241 346 Patan - Tel: (02766) 222 306

Ahmeda. (Bapu Nagar) - Tel : (079) 3091 6900 - 02 Hyderabad - A S Rao Nagar Tel: (040) 4222 2070-5 Patel Nagar - Tel : (011) 45030 600

Ahmedabad (C. G. Road) - Tel: (079) 4021 4023 Hubli - Tel: (0836) 4267 500 - 22 Porbandar - Tel : (0286) 3941 394

Ahmeda. (Gurukul) - Tel: (079) 3011 0800 / 01 Indore - Tel: (0731) 3049 400 Porbandar (Kuber Life Style) - Mob.-98242 53737

Ahmedabad (Kalupur) - Tel: (079) 3041 4000 / 01 Indore - Tel: (0731) 4238 600 Pune - Tel : (020) 3093 4400 / 3052 3217

Ahmedabad (Maninagar) - Tel: (079) 3981 7430 / 1 Jaipur - (Rajapark) Tel: (0141) 3057 900 / 99833 40004 Pune (Aundh) - Tel: (020) 4104 1900

Central Support & Registered Office:G-1, Akruti Trade Centre, Road No. 7, MIDC Marol, Andheri (E), Mumbai - 400 093 Tel : 2835 8800 / 3083 7700

January
July 24, 2009
30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539 17