Stock picks by eminent wizards cannot be ignored
When Daljeet Kohli earnestly recommended a buy of City Union Bank in March 2016, all and sundry (including me) gave him the royal ignore.
The reason for the indifference was because none of our favourite eminent stock wizards were invested in the stock at that time.
This turned out to be a tactical error because Daljeet’s sense of timing was impeccable.
City Union Bank reported blockbuster results and spurted like a rocket from Rs. 90 to Rs. 150, leading to impressive gains of 65% in less than a year’s time.
Now, we can afford to ignore Daljeet Kohli but can we ignore the combined wisdom of Brahmal Vasudevan and Prashant Jain?
Brahmal Vasudevan’s stock picking prowess is the stuff of legends. His Creador Capital has effortlessly pocketed multibagger gains from stocks like Cholamandalam Finance, Somany Ceramics, Repco Home Finance and PC Jewellers.
In fact, any investor who had mindlessly cloned the picks of Brahmal Vasudevan would have gains in excess of 250% to his credit in the last four years.
Prashant Jain needs no introduction to us. He has personally steered HDFC Mutual Fund into the status of a behemoth on the back of his superb stock picking abilities. His funds have delivered a return of 40x in the past 21 years as compared to a return of 7x from the Sensex.
Of course, in recent times, his funds have been lagging behind and this has led novice investors to ask whether he has “lost his touch”. The credible answer is that Prashant Jain has not lost any of his stock picking skills though the mammoth size of his funds makes it difficult to outperform smaller peers.
Brahmal Vasudevan’s Creador buys 2.45% of City Union Bank
I reported in July 2016 that Creador Capital had invested Rs. 130 crore in buying 2.45% of City Union Bank’s equity.
HDFC Mutual Fund buys big chunk of City Union Bank
The big news now is that HDFC Mutual Fund has bought a massive chunk of 52,48,000 shares of City Union Bank on 3rd November 2016 at Rs. 149.20 each. The total investment is Rs. 78.30 crore.
Why the bullishness for City Union Bank?
The reason why City Union Bank is proving so alluring to the ace investors is cogently explained by Radhika Merwin of Business Line. The points she has made can be summed up as follows:
(i) Focus on high yielding MSME borrowers:
CUB is following the sensible strategy of focusing on the MSME (micro and small and medium enterprises) and wholesale and retail traders segment. These high yielding segments constitute a little over half of the bank’s portfolio. The bank’s focus on secured lending, cautious approach to corporate lending, improving margins and strong capital base are key positives.
(ii) Reasonable valuations:
CUB is presently trading at 2.2 times its one year forward book value. While this is higher than its three-year historical average of 1.6 times, the valuations of most private banks have gone up sharply in the past year.
At an expected earnings growth of about 20 per cent over the next two years, sound return ratios of return on asset (RoA) of 1.5 per cent and return on equity (RoE) of 15-16 per cent and strong capital position make the valuations reasonable.
(iii) Robust loan growth despite prudent lending practices:
City Union Bank has a strong SME (small and medium enterprises) client base in Tamil Nadu.
In the latest June quarter, the bank continued to deliver strong loan growth of 19 per cent year-on-year. Its steady growth in loans is encouraging and its cautious stance on the corporate segment lends comfort. The management is not in favour of pursuing aggressive growth in loans at the cost of compromising asset quality. The bank’s focus on working capital loans (65 per cent of loans) and secured loans (99 per cent of its loans) also mitigates risk.
(iv) Equity dilution is not expected:
The bank is well capitalised for growth over the next two years. Its’ Tier I capital ratio stood at 14.76 per cent as of June 2016. The management expects 15-18 per cent growth in loans in the coming year, and will look at growing at a faster pace once the economy improves.
(v) Steady increase in net interest margins (NIMs):
Aside from healthy traction in loans, notable improvement in margins has also kept earnings in good stead. Over the past year or so, the rate easing by the RBI has led to a fall in both lending and deposit rates. But for City Union Bank, the fall in yield on advances has been lower than the reduction in the cost of deposits. This has aided margins.
The bank’s strong retail deposit base has also aided margins. The net interest margin (NIM) improved from 3.4 per cent in 2014-15 to 3.8 per cent in 2015-16. In the latest June quarter, the NIM inched up further to around 4 per cent. The margin may contract over the long run as competition builds up. But it should remain within the 3.5-3.7 per cent band.
(vi) NPAs (Bad loans) are under control:
City Union Bank’s bad loans increased from 1.8 per cent of loans in 2014-15 to 2.4 per cent in 2015-16.
However, the slippage ratio (additions to bad loans as a percent of loans) has been moderating in recent quarters and the trend is likely to continue. The management expects the slippage ratio to remain in the 1.75-2 per cent range for 2016-17; in 2015-16, the ratio stood at 2 per cent and in the latest June quarter it was 1.8 per cent (annualised).
The management has indicated though that it is facing challenges in liquidation of collaterals. This is expected to improve as the economic cycle picks up.
Focus on “time tested and successful strategy”
In an in-depth interview with Mythili Bhusnurmath, the noted economist, N Kamakodi, the MD and CEO of CUB, revealed several nuances of how the Bank is conducting its business.
In particular, N Kamakodi emphasized that the Bank is avoiding focusing on the “consumption game” and is instead focusing on “adding more value in these businesses on business loan rather than the consumption front”.
In other words, unlike other banks and NBFCs which are focusing on “retail lending”, CUB is focusing only on its core MSME sector. Kamakodi called it the “time tested and successful strategy”.
No major competition or impediment for growth from payment banks & small finance banks
Kamakodi offered the soothing opinion that small private banks like CUB will not be adversely affected by the competition expected to come from MFIs, payment banks and the small finance banks.
He explained that the MFIs are targeting the borrowers who want less than Rs. 1 lakh while the NBFCs and others are targeting borrowers wanting upto 10-15 lakhs.
In contrast, small private banks like CUB are comfortable lending to borrowers in the Rs. 50 lakh to 10 crore segment.
So, the competition overlap will not exceed 5% of the business, Kamakodi said.
15-18% growth is commendable
Kamakodi confidently asserted that City Union Bank would achieve a growth rate of 15-18% credit growth for the current year.
Mythili Bhusnurmath described this growth rate as “very commendable” given the state of the economy. This implies that as the economy improves and interest rates soften, City Union Bank can be expected to grow at a faster pace.
Conclusion
In my earlier piece, I drew attention to the research reports from Daljeet Kohli, HDFC Securities, Motilal Oswal, ICICI Securities, all of whom have recommended a buy on the basis that City Union Bank is on a strong growth trajectory and enjoys better fundamentals and valuations than its peers. The confidence reposed in CUB by Brahmal Vasudevan and Prashant Jain confirms that this hypothesis is correct and that more mega bucks can be harvested from the stock in due course of time!
City union blank is good small bank and I expect it to perform for long time to come.
IDFC Bank is a better bet and cheaper too on P/B.
IDFC Bank is certainly a great bank in the making.
IDFC BANK LTD IS THE BEST BUY FOR LONG TERM. INVEST AND FORGET.
GOOD LUCK
IDFC bank is also a good bet.
I wil bet on RBL bank.Very impressive managemnet and gud valutions.
RBL is also a good bet.
RBL CUB IDFC Bank are all good bets so is DCB.
I think a comparison is required who amongst all have the potential to lead.
One can go for basket investing in all these including DCB ,there will be minimum chance of going wrong.