DSIJ Mindshare

Stock Pick From The Banking Sector

Choice Scrip is a Blue Chip stock pick that is expected to give returns within a 6 months-1 year horizon. The recommendation is based on a fundamental analysis of the company.

The company recommended as the Choice Scrip for this issue is a leading banking company.

J&K Bank - Towering Performance

HERE IS WHY

  • It registered a resounding performance during the quarter and year ended March 2012, with the deposits up by (19 per cent) and advances up by (26 per cent).
  • It has among the best asset qualities in the industry, its net NPAs decreasing by five basis points to 0.15 per cent in FY12 YoY.
  • It is a high dividend yielding stock available at attractive valuations.

After the RBI maintained status quo with regard to the interest rates at its recent monetary meet, our selection of a banking company as the Choice Scrip of the fortnight could well be a surprise. Well, for one, the RBI retaining its key rates at the same level does not really have a negative impact on the banking space. Further, we at DSIJ, have been of the view that the worst is almost over for the sector. To ward off any concerns, we took a conservative approach and looked only at those banking stocks that have performed well in the recent past. Jammu & Kashmir Bank (J&K Bank) is one such entity that has performed well and is poised to grow well going ahead too. Its good asset quality, sustainable margins, good business growth and availability at an attractive valuation makes the scrip worth consideration.

BEST OF LAST ONE YEAR

Name of Company

Reco.

CMP(Rs)

Gain%

Ajanta Pharma

342.00

707.00

106.73

Asian Paints

2985.00

3763.00

26.06

Suprajit Engineering

19.80

23.50

18.69

FAG Bearings India

1261.00

1461.00

15.86

HSIL

133.00

152.00

14.29

Munjal Showa

71.50

80.00

11.89

Colgate Palmolive (I),

1014.00

1130.00

11.44

Bharat Petroleum

686.00

751.00

9.48

CMP as on June 26, 2012

Even in a volatile macro-environment, the bank has seen robust business growth that has been above the RBI’s projections. For FY2012, its deposits increased by 19 per cent (against the RBI’s projection of 15.5 per cent) to Rs 53346 crore, while the advances increased by 26 per cent (against the RBI’s projection of 16 per cent) to Rs 33077 crore. Most of the key parameters showed a robust performance, indicating that the bank is immune to the volatilities of an uncertain macro environment. Let’s take a look at the bank’s asset quality, which is a factor that has been hurting most of the banking companies. However, this has not been the case with J&K Bank, as its net NPAs actually decreased by five basis points to 0.15 per cent on a YoY basis and declined by one basis point on a sequential quarter basis.

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These figures could be considered among of the best in the industry. Further, the bank has maintained a very high provision coverage ratio (PCR) of 93.76 per cent, which provides a sense of confidence as the risk of asset quality deterioration decreases.

Share Holding Pattern as on 31/03/2012

Promoters

53.17

FII

25.24

Mutual Funds and UTI

2.33

Private Corporate Bodies

7.14

Others

1.08

General Public

11.04

GRAND TOTAL

100

The second most important parameter is the net interest margin (NIM), which has improved remarkably. For the March 2012 quarter, the bank’s NIM increased by 14 basis points to 3.86 per cent on a YoY basis. The Capital Adequacy Ratio (CAR) stood at 13.36 per cent, with Tier 1 CAR at 11.12 per cent. Due to its healthy CAR, the bank will be less affected by the implementation of the Basel III norms.

For FY2012, J&K Bank’s Net Interest Income (NII) increased by 19 per cent to Rs 1838 crore, while the net profit grew by 30 per cent to Rs 803 crore. The provisions decreased by 21 per cent to Rs 169 crore, which helped it to post a good bottomline. Further, the cost-to-income ratio, which reflects any bank’s efficiency in doing business, was also in its favour. For FY2012, this ratio decreased by 285 basis points to 36.92 per cent on a YoY basis.

LAST FIVE QUARTERS (Rs /CR)

 

Mar ' 12

Dec ' 11

Sep ' 11

Jun ' 11

Mar ' 11

Sales

1,357.54
1,266.53
1,155.60
1,055.91
1,013.86

Other Income

122.27
73.63
71.22
67
119.02

Interest exp

841.44
815.74
721.33
618.71
598.12

Provisions Made

84.26
18.16
22.33
44.48
75.6

Total taxation

125.24
92.21
90.79
89.61
81.77

Net Profit / Loss

208.12
213.19
199.65
182.29
138.56

Equity Capital

48.4948.49
48.49
48.49
48.49

The management has set a business target of Rs 100000 crore for FY13 (up from Rs 85000 crore reported in FY12). It expects to earn a net profit of Rs 1000 crore. (against Rs 803 crore earned in FY12). Further, the bank’s dividend yield is around 3.6 per cent, which is also very good. The scrip is available at a price-to-earnings multiple of 5.64x and an adjusted Price to Book Value of around 1.12x, which makes it very attractive. We believe that one could invest in the scrip with a longterm horizon.

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