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 Sept 30, 2017, the bank did not have a very good set of numbers.
Net profit fell from Rs 148 crores to Rs 75.65 crores.
The gross non performing assets which is a major concern for banks at the moment moved higher to 4.83 from 4.27 per cent. However, despite this we believe that the worst in terms of NPAs are behind.
The stock has fallen from levels of Rs 140 to Rs 121, which now reflects the poor performance for the quarter ending Sept 30, 2017.
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 near 12 per cent is also good for further expansion. The bank reported an EPS of Rs 1.25 for the quarter ending Sept 30, 2017. Even if it does an EPS of Rs 8 for FY 2017-18, the stock remains undervalued at a p/e of just 15 times. Another important aspect that the stock is cheap at just 1.43 times price to book value.
This is another good banking stock that is worth investing in. Karnataka Bank saw a reduction in its non performing assets.
Net NPA of the bank stood at 3.04 per cent of gross advances for the quarter ending Sept 30, 2017, which was down from 3.20 per cent, seen in the quarter ending June 30, 2017. 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 Sept 30, 2017, the bank reported an EPS of Rs 3.30. Even if you annualize the same and the bank does an EPS of Rs 15 in FY 2017-18, the stock is trading at a p/e of just 10 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 31. The stock has a face value of Re 1 and gives a decent dividend.
The bank reported a decline in non performing assets for the quarter ending Sept 30, 2017 to Rs 3.57 from 3.61. The stock is undervalued at just 14 times 2018-19 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 31. 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 there is a sharp improvement in the asset quality of banks, during the quarter ending Sept 30, 2017.
Bank of Baroda is the third largest government owned bank in the country.
Recently, the stock had rallied to a new 52-week high of Rs 208, following the government's decision to re-capitalize banks. However, it has now fallen to Rs 166. This 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 PNB. 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.