Rakesh Jhunjhunwala Stock Posts Strong Business Update In Q2: Buy Next Week For 15% Upside?

In Q2FY2024, Federal Bank reported outstanding business performance in terms of both loan and deposit growth. With total deposits rising by 23 per cent year on year (YoY) to reach Rs 2.3 lakh crore, Federal Bank reported that its gross advances jumped by 20% YoY to reach Rs 1.9 lakh crore in Q2FY24, up from Rs 1.6 lakh crore in the same quarter of the previous year, according to an exchange filing on October 2. The bank said in an exchange filing that wholesale credit books climbed by 17% and retail credit books surged by 22% YoY in Q2FY24.

To Rs 72,592 crore, the CASA deposits climbed 5% from Q2FY23. In light of this, the CASA ratio for the quarter ended September 30 was 31.17%, a drop of 68 basis points over the same quarter of FY23. After the significant business upturn, on Tuesday, October 3, 2023, the shares of Federal Bank reached a new 52-week high of Rs 152.25. However, the brokerage company Sharekhan feels that the bank has a stable outlook for asset quality and steady growth, for which it sees a potential upside of 15% from the present market price to a target price of Rs. 170.

"Federal Bank reported strong business performance in Q2FY2024 in terms of loan growth as well as deposit growth. Near-term business trends look comfortable for the bank except NIMs and the franchise is looking towards a more predictable performance. The bank has a strong granular liability franchise with retail deposits making up ~82% of overall deposits and asset quality outlook continues to remain stable to positive, thus reversal in return ratios & growth is unlikely.

The bank is likely to sustain RoA of over ~1.2% led by strong loan growth, healthy fee income and benign credit cost despite NIMs pressure in near term which should translate into normalised RoE of ~15%. Valuations are reasonable for such RoE trajectory. Potential value unlocking in Fed Fina (the NBFC subsidiary) via an IPO is likely as suggested by media reports," said the research analysts of Sharekhan in a note.

Commenting on the valuation of Federal Bank, the brokerage note stated that "We believe the bank is well poised to sustain RoA of over 1.2% in the near term despite margin headwinds. Strong asset quality and in turn lower credit costs are likely to support return ratios and reversal in return ratio is unlikely. We believe the bank still has levers to surprise positively from here on, led by operating leverage and higher core fee income. At the CMP, the stock currently trades at 1.2x /1.1x its FY2024E/ FY2025E BV estimates."

"We reiterate a Buy on Federal bank with an unchanged PT of Rs. 170. The bank is likely to sustain a RoA of over ~1.2% led by strong loan growth, healthy fee income and benign credit cost despite NIM pressure in near term, which should translate into normalised RoE of ~15%," the brokerage note stated.

The NBFC subsidiary of Federal Bank, Fedbank Financial Services (FedFina), is getting ready for an IPO. Currently, the bank holds 73.2% shareholding in the company. The IPO will be carried out through a fresh issue or an offer for sale (OFS), and it is anticipated to be carried out in H2FY24. Upon the IPO, FedFina would still be a subsidiary of Federal Bank, according to Sharekhan. The International Finance Corporation (IFC) received permission from the Reserve Bank of India (RBI) last week to acquire a 9.7% shareholding in Federal Bank.

Federal Bank Share Price

On Friday, the shares of Federal Bank closed on the BSE at Rs 146.50 apiece up by 0.51% from the previous close of Rs 145.75. During Q2FY24, the bank reported promoters' shareholding of 28.02%, DIIs stake of 43.65% and public stake of 28.34%. As per the shareholding pattern of Federal Bank for Q2FY24, late ace investor Rakesh Jhunjhunwala held 2,45,00,000 shares or 1.05% stake in the company while his wife Rekha Jhunjhunwala held 4,82,13,440 shares or 2.07% fully paid up equity stake in the bank.

Disclaimer

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