Midcap Multibagger Banking Stock To Buy With Potential To Rally

Prabhudas Lilladher is betting on the stock of Federal Bank, which has rallied significantly in the last few years, turning it into a multibagger. The broking firm sees an upside to Rs 170 on the stock from current levels.

Federal Bank: Good quarterly numbers

According to Prabhudas Lilladher, Federal Bank again surpassed its previous quarter best, with core earnings at Rs7.75 billion, beating PLe by 16% led by NIM beat which came in at 3.89% (PLe 3.66%) as funding cost was lower at 4.9% (PLe 5.1%).

"Bank further raised steady state NIM guidance from 3.30% to 3.35-3.40%. We too increase NIM for FY23E by 12bps and FY24/25E by ~6bps each as 1) high yielding book, which touched Rs62bn, could double in 2+ years and 2) upward deposit repricing could be slower to peers (~60% of deposits as at FY22 have a maturity >3 years)," the brokerage has said.

Prabhudas Lilladher raises target price on the stock to Rs 175

According to Prabhudas Lilladher, fee income in 9MFY23 has risen by 43% to Rs12.9bn and bank expects current run-rate to continue. "Hence, we increase FY23 PAT by 6% and FY24/25E PAT by 2% each. With consistent beat in core profitability, re-rating should continue for FB. Rolling forward to FY25E ABV, we raise target price to Rs 175 from Rs165, maintaining multiple at 1.5x. Reiterate BUY," the brokerage has said.

NII: A beat

NII was a beat at Rs19.5 bn (est. Rs18.4bn) due to lower cost of funds, according to Prabhudas Lilladher. NIM was a beat at 3.89% (PLe 3.66%) as funding cost was better at 4.9% (PLe 5.1%) while yield on assets as expected was 8.81%. Loans/deposits grew by 19.5%/14.8% YoY. While other income was in-line at Rs5.8bn, fee income was ahead at Rs4.63bn (PLe Rs4.5bn).

High yielding loans

According to Prabhudas Lilladger, loan growth was 4.3% QoQ and led by corporate and SME growing at 5.5%/3.9% while retail growth was tad slower at 2.9%. Robust corporate growth largely emanated from WC as private capex demand has been enhancing. "On retail, the higher yielding segments of CV/CE, MFI and CC have touched Rs62bn (less than 1/3rd a year ago) and target is to double this book in 2+ years. Due to new digital lending guidelines, gold loans fell by 9.5% QoQ to Rs4.8bn (digital contribution at 35-40%), which is expected to normalize. Management has guided for an overall loan growth of high teens in FY24E. Bank raised higher wholesale deposits (~10% share) as LDR threshold is 84-85% although SA is expected to pick up in near term," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of Prabhudas Lilladher. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.