An undervalued stock is one that is trading at less than its natural value.There are two types of stocks: one is the overvalued stock and the other is undervalued. The value stocks involve more risk as it is difficult to tell when it has can hit a bottom. Recently, there has been a phenomenal run in government owned banking stocks. Hence, we have to really find value in some of them, as they have gained strongly. Nontheless, we have selected a few where we believe there is still value.
Karur Vysya Bank
Karur Vysya Bank has the distinction of paying 100 per cent and above dividend for the last 14 years. For the first quarter ending June 30, 2017, the bank has reported a good set of numbers.
Net profit was higher at Rs 148 crores, while the operating profit of the bank was up by a huge 30 per cent at Rs 449 crores.
The net interest margin expanded by 25 basis points to 3.76 per cent. Non performing assets which is a major concern for banks at the moment was well within control at 2.85 per cent. Deposits at the bank for the quarter also surged by 7.8 per cent to Rs 54,668 crores.
Karur Vysya Bank: Well placed going forward
Going ahead there is unlikely to be too many worries for Karur Vysya Bank, given the fact that its loan book is well spread. Its loan book has very marginal exposure to troubled industries.
In fact, an other area worth mentioning is that the top 20 borrowers of the bank, form just 10 per cent of the loan book.
The capital adequacy at 11.71 per cent is also good for further expansion. The bank reported an EPS of Rs 2.43 for the quarter ending June 30, 2017. Even if it does an EPS of Rs 12 for FY 2017-18, the stock remains undervalued at a p/e of just 12 times. Another important aspect that the stock is cheap at just 1.5 times price to book value.
This is another good banking stock that is worth investing in. Karnataka Bank saw its profits jump 10 per cent to Rs 134 crores.
Net NPA of the bank stood at 3.20 per cent of gross advances, which was much better when compared to even some larger private sector banking peers. The bank also believes that the asset quality pressure is moderating and the capital adequacy should leave room for further growth.
For the quarter ending June 30, 2017, the bank reported an EPS of Rs 4.74. Even if you annualize the same and the bank does an EPS of Rs 20 in FY 2017-18, the stock is trading at a p/e of just 7 times one year forward earnings. The shares are also trading below below book value leaving immense potential for growth in the coming quarters.
South Indian Bank
This is another bank that we liked at the current levels of Rs 28. The stock has a face value of Re 1 and gives a decent dividend.
The bank reported an EPS of Rs 0.56 for the quarter ending June 30, 2017. If the bank keeps maintaining the same EPS every quarter, it can report an EPS of Rs 2.4 for 2017-18 or in fact even more. This makes the stock undervalued at just 14 times one year forward earnings.
Again, this is very low for a private sector bank with a solid branch presence in South India. Another great banking pick at the current levels of Rs 28. Check stock quote of South Indian bank here
Bank of Baroda
It would be inappropriate if we do not recommend a government owned bank, given that if there is a sharp improvement in the asset quality of banks, the first to benefit would be the government owned banks. Bank of Baroda is the third largest government owned bank in the country.
Recently, the stock had fallen to a new 52-week low of Rs 136 on the NSE. However, it has now spiked to Rs 170, following the govermen't decision to capitalize some of these banks. This is one big reason to recommend the stock. Apart from this there could be an improvement in the asset quality of Bank of Baroda, which should make the share a good bet at the current levels.
If you get the stock at levels of Rs 150, it may be a good bet from a long term perspective. Bank of Baroda in terms of per centage gains has not rallied as much as peers like Bank of Baroda. Hence, there maybe some potential upside in the stock.
The article is not a solicitation to buy, sell in securities or other financial instruments. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article. The author and his family do not own any shares in the above mentioned stocks.