Federal Bank gives 63% gain since Akash Prakash’s recommendation
Akash Prakash is one of the old-school whiz-kid investors who do not believe in offering stock tips to novice investors. He believes that novice investors should learn to fend for themselves and not depend on being spoon-fed by ace investors.
Yet, he made an exception on the noble occasion of the Sohn-India conference. He joined other eminent dignitaries such as Rakesh Jhunjhunwala, Kenneth Andrade, Shankar Sharma, Raamdeo Agrawal etc in making stock recommendations.
Akash Prakash’s reasons for recommending Federal Bank as an investment candidate were flawless. He explained that the Bank has appointed a new management team which is filled with vigour and vitality to grow at an aggressive pace even while keeping the risks under control. He also emphasized that the severe problems being faced by the PSU Banks in terms of the surging NPAs, which has crippled their ability to lend further, provides a golden opportunity to well-capitalized private Banks like Federal Bank.
Well, the recommendation was brilliant because Federal Bank is up a magnificent 63% since then (June 2016). The YoY gain is 83%.
Stranglehold by Billionaires
Few stocks can boast of having won the confidence of eminent Billionaires like Rakesh Jhunjhunwala and MA Yussuffali. Federal Bank is one of the rare ones. The two stalwarts hold a king’s ransom of Federal Bank stock which is collectively worth an eye-popping 873 crore.
Amansa Capital also holds a massive chunk of 73,816,854 shares which is worth Rs. 627 crore at the CMP of Rs. 85.
Mark Mobius offered Federal Bank to us as a “Diwali Gift”
Mark Mobius, the legendary fund manager with Templeton MF, is another stickler who never talks of specific stocks. Yet, he made an exception on the joyous occasion of Diwali 2016 and recommended that we buy Federal Bank.
Of course, credit for tactfully persuading Mark Mobius to make a recommendation has to go to Tanvir Gill, the charming and effervescent editor of ETNow.
Sanjoy Bhattacharyya trusts Federal Bank
Sanjoy Bhattacharyya, the doyen amongst value investors, has the welfare of novice investors paramount in his heart. He uses every occasion to drill investment theories into our head and also offers us stock tips from time to time.
He recently teamed up with David Cornell, the fund manager of Ocean Dial Gateway to India Fund, to discuss the numerous multibagger stocks held in the portfolio of the Fund.
Federal Bank is one of the major holdings of the Ocean Dial Fund. Both wizards heaped rich praise on the Bank and confirmed that it has a bright future ahead of it.
Federal Bank has “rediscovered its mojo” and has “significant upside”
Now, the important aspect is that despite the hefty gains posted by Federal Bank, Akash Prakash has come out with all guns blazing in its favour. His words of wisdom are worth listening to:
“I talked to Federal Bank. My entire presentation was Federal Bank. The stock was 43 or 44 or something at that point in time. The stock has obviously done well. There is a significant upside from here as well. There is genuine change there. They have rediscovered their mojo. They are much more confident. Good management team. Good additions to management. Much more aggressive. Good capital adequacy. It is well positioned. The bank should do very well.”
Porinju Veliyath also recommends Federal Bank
Porinju Veliyath knows the ins and outs of Federal Bank because they come from the same place i.e. Kerala.
He assured that new generation private banks like Federal Bank are a must buy because they would make “record breaking” profits. He also assured that the valuations at which Federal Bank is quoting offers a large “margin of safety”.
“Strong balance sheet and core PPoP growth; Stable asset quality
Federal Bank’s (FB) 3QFY17 PAT grew 26% YoY to INR2.05b (10% beat), led by strong core PPoP growth (+42% YoY) and lower credit costs (64bp annualized). NII grew 31% YoY and 9% QoQ to INR7.9b, driven by strong loan growth and stable sequential NIM (+28bp YoY to 3.3%). Adjusted for one-off income of INR190m, NII grew 28% YoY.
Other income increased 44% YoY (5% miss), led by strong growth in fee income (+33% YoY). Trading gains were lower than expected at INR860m (27% of PBT)
Strong loan growth of 32% YoY was driven by corporate (+71% YoY; predominantly consisting of working capital loans) and retail (ex-gold loans, +35% YoY).
Deposit growth of 23% YoY (+7% QoQ) was led by strong mobilization in SA deposits (+32% YoY). CASA ratio improved 360bp QoQ to 34.7% (CASA grew 33% YoY)
Incremental slippages increased marginally to INR2.73b from INR2.66b in 2Q (annualized slippage ratio of ~2.1%), led by higher slippages in corporate and retail. The bank made use of the RBI’s 90dpd dispensation on portfolio of ~INR350-400m. Absolute GNPA increased 7% QoQ, but remained stable in percentage terms (2.77%). There was no sale to ARC during the quarter. Valuation and view: We are enthused by FB’s core operating performance, driven by its strong balance sheet. Although the bank’s corporate asset quality issues may not be completely behind, we believe it is ahead of corporate lending peer banks on the asset quality curve. Considering asset quality distractions in the PSU space, we believe FB is well positioned to gain market share in highly rated corporates. We largely maintain FY17/18 estimates, and retain Buy with a target price of INR105 (1.8x December FY18 BV) based on RI model.”
Buy recommendation of Reliance Securities – target price Rs. 100
“We believe that Federal Bank is coming out of the scenario – marked with higher provisioning and continued stress on assets quality for last few quarters – with moderation in fresh slippages and improvement in loan book. We expect healthy traction in earnings owing to robust growth in loan book, moderate credit cost and healthy margins. We continue to reiterate our BUY recommendation on the stock with Target Price of Rs100 based on 1.9x FY18E Adjusted book value.”
“Federal Bank (FB) reported strong earnings at Rs 206 cr which grew by 26% YoY (up 2% QoQ). These strong earnings were mainly on account of strong loan growth and improvement in margins. Loan growth improved to 32% YoY (8% QoQ) from 27% in Q2FY17 on the back of increase in corporate loan (up 53% YoY) and Retail +Agri loan book (up 23% YoY).
We expect advance growth to improve to 20% (earlier 17%) for FY17E led by growth in Corporate, SME and Retail portfolio. Going forward, management’s focus would be on containing slippages from its corporate book, reduce its cost of borrowing and also increase lending towards retail and SME. Management have identified and addressed all stressed accounts and guided for few restructured accounts of Rs. 257 cr under watch list. We value FB at FY18E P/ABV multiple of 1.9x to arrive at target price of Rs 96/share and retain BUY rating on the stock.
“Higher slippages have been hurting earnings in the past couple of quarters. However, the pace of slippages has pared down, which remains encouraging. However, future asset quality trajectory needs to be watched, especially in the wake of increasing corporate exposure. Factoring in higher balance sheet growth, we have revised our earnings estimate and expect PAT CAGR at 52% in FY17-18E. RoA is expected to inch up to 1% in FY18E. Consequently, we revise our target price upwards to Rs 87 from Rs 80 earlier, as we assign higher multiple of 1.75x FY18E ABV. Consequently, we upgrade our rating on the stock to BUY.”
“Federal Bank’s (FB) 3Q performance was positive. Earnings beat (NII/PAT was 10/7% ahead of estimates) was led by strong broad-based loan growth (+32%), healthy CASA growth (33%), steady NIM (3.3%) and stable asset quality. However, opex (13% QoQ) saw a steep rise due to pension provisions of Rs 170mn and one-off demonetisation related expenses of Rs 430mn, resulting in a 300bps rise in C-I ratio. While slippages were stable QoQ, utilisation of RBI’s dispensation lowered them by Rs 350-400mn (23bps ann.).
Federal Bank has made incremental progress in reviving growth and pulling back on asset quality; slippages are at a 7-quarter low, while loan growth is accelerating. For oplev to play out, costs must now be pegged. We have raised estimates by 9/5% for FY17E/18e. Our BUY is based on growth and asset quality recovery, for which FB is now well poised. Our revised TP of Rs 93 (1.7x Dec-17 ABV of Rs 55) faces upside risk from a positive surprise on costs and efficiency.”
Buy recommendation of Edelweiss – target price Rs. 100
“Federal Bank’s (FB) Q3FY17 earnings were broadly in line with estimates. NII was better than anticipated (up >30% YoY/9% QoQ), but higher opex (up 13% QoQ, largely following one-off cost due to demonetisation) kept profitability in line. The quarter saw sustained growth march — loan spurted >30% YoY driven by higher corporate growth — leading to better NII (4th quarter of improvement)
After a soft FY16, we saw FB coming into sweet spot given up-fronting of stress recognition and growth levers. Focus on building revenue momentum renders comfort that bank will track >40% earnings CAGR over FY16-19E with RoE improving to 14%. We roll forward to FY19E earnings, and revise our TP to INR 100 (1.7x FY19E P/ABV; earlier INR 88). At CMP, the stock is trading at 1.3x FY19E P/BV. We maintain ‘BUY/SP’“.