Share market, stock buying and investment tips: These two banks are Rakesh Jhunjhunwala's favourites - Should you invest to become rich?
There are a host of bank stocks which can be best bets for investment on Dalal Street. Remember HDFC Bank, ICICI Bank and State Bank of India (SBI) they are defined as ‘Too Big To Fail’ bank by RBI, which simply just restores investors faith and can be anytime a safe appetite for equities. But ace investor Rakesh Jhunjhunwala sees it differently. While many investors await price correction in major lenders so that they can buy the particular stock, on the other hand, the Dalal Street king only has an eye for only two banks. These two banks are Federal Bank and Karur Vysya Bank. The simple question here is what does the big bull sees in these two banks. Also, considering when Jhunjhunwala talks people listen, hence are these banks worth investing as well.
As on December 2018, Jhunjhunwala holds about 1.74% stake in Federal Bank and 4.16% stake in Karur Vysya Bank.
His investment in Karur Vysya comes a long way beginning from December 2015, whereas he bought Federal Bank under his ambit from March 2016.
Investment in Karur Vysya by Jhunjhunwala has been a roller coaster ride since December 2015. The investor has made many buying and selling in 3 years, and one of the largest investment was made in December 2017 where he increased his holding to 3.09% which was more than double from 1.50% in September 2017. A further buying was made in March 2018 quarter, where he took his holding to 3.36% in the bank, however, since then the course of action has changed to selling.
Similar has been the trend in Federal Bank. Interestingly, from December 2016, Jhunjhunwala has reduced his holding in this bank on multiple occasions.
Coming to stock performance, in a year, Federal Bank has tumbled by 17.22% in Jhunjhunwala’s portfolio, whereas Karur saw a decline of 18.04%, as per a TrendLyne.com data. However, it is noteworthy that the quantum of loss given by these two banks is still less for Jhunjhunwala compared to his other renowned holdings like DHFL, Edelweiss Financial Services, SpiceJet, Geojit Financial Services and Bilcare.
Currently, the stock price of Federal Bank and Karur Vysya trade near Rs 96 and Rs 92 level on Sensex. But did you know, these two banks have clocked all-time high of Rs 116.75 per piece and Rs 117.6 per piece last year.
— Zee Business (@ZeeBusiness) January 10, 2019
What is also noteworthy is that both Federal Bank and Karur Vysya Bank have made many investors rich in a decade. From 2008 to 2018, Karur has surged by a massive 180.2% and Federal by a whopping 241.3%.
Last year, when asked about why have likes for Federal Bank and Karur Vysya Bank, Jhunjhunwala in an exclusive interview to CNBC TV18 said, “If you look at the peak provisioning profits, once the provisioning normalises, the profits will just go through the roof. So, the return on assets will go up, consequently, the valuations will go up. So not only we will benefit from enhanced earnings, but we will also benefit from enhanced valuation.”
He reportedly added, “ I think banking today, especially good banks who have legacy problems are very attractive investments and I have investments and I am an interested party.”
Thereby, one can definitely believe that Jhunjhunwala sees a bigger picture in Federal Bank and Karur Vysya Bank’s valuation. Also, considering Jhunjhunwala’s investment methods are idolized from ‘Oracle of Omaha’ Warren Buffett, it will be interesting to see if these two banks turn out to be dark horses in the race of markets for Jhunjhunwala.
A lesson from Warren Buffett: On multiple occasions, Jhunjhunwala has paid tribute and shown high respect for world’s equity king. But did you known Buffett was one investor who made big billions during Global crisis in 2008. Buffett even told The New York Times in October 2008, that he is buying American stocks. Even his company Berkshire Hathaway made few investments.
That time, Buffett stated to the news agency, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.”
Hence, right now when the markets are in panic mode ahead of Budget 2019 and General Elections 2019, is it the time to be greedy in Federal Bank and Karur Vysya Bank.
— Zee Business (@ZeeBusiness) January 10, 2019
Should you buy?
On Federal Bank, Gaurav Jani and Aalok Shah analysts at Centrum has initiated coverage with Buy rating and target price of Rs 135 per piece.
The duo said, “FB is evolving to a more prolific private banking franchise on the back of its balance sheet size, quality growth trajectory, pan India expansion strategy, branch light-distribution heavy model, digital architecture and senior management pedigree.”
Further, they added, “The bank’s distribution network will enhance overall operating efficiency. Incremental flow to higher rated assets has maintained capital adequacy at healthy levels (CAR-13.3%). Stressed asset ratio has substantially declined over FY14-Q2FY19 (best among regional peers) and we expect credit costs to recede. All these levers will enhance RoA/RoE to by 41bps/50bps over FY18-21E to 1.1%/12.6%.”
Also, Anusha Raheja analysts at LKP Securities said, “Federal Bank has outgrown from the tag of old private sector bank by doing market share wins in businesses, acquiring customers rapidly, improvising processes & engagement levels with the clients, filling the service gaps, mending digital initiatives in line with private sector banks, building strong management bandwidth – to become at par with the other large private sector banks. However, this larger picture has been ignored in the chaos of NPA mess.”
Raheja explains saying, “ Asset quality problems should also start to recede incrementally despite Kerala floods. In our view, once the dust settles on asset quality woes, the bank would get multiple re-rating. BUY with TP of ₹ 121, upside of 30%.”
Moreover, on Karur Vysya, analysts at Nirmal Bang said, “Among the old generation pvt. banks, we believe KVB can potentially reach the profitability levels (ROE) of CUB over the next four years (by FY22E) on the back of robust capitalization and lower capital consumption which ensures no dilution risk in the medium term and therefore a consistent rise in ROE.”
“Sharpening focus on the retail and SME segments while building revenue as well as profit momentum (loan/PAT CAGR of 15%/71%, respectively, over FY19-21E), up-fronting recognition of problem assets and transformation into a granular and higher RoE business combined with cheap valuations at 1.3x FY20 ABV provides good scope for re-rating,” as per Nirmal Bang.
Hence, Nirmal Bang recommends a ͚BUY͛ on the stock with a price target of Rs. 110, based on 1.75x FY20E ABV (25% discount to CUB), offering an upside of 39% from CMP.
Thereby, if you are planning to invest in equities then you might want to have a look at Federal Bank and Karur Vysya. One can become rich from these two banks just like Jhunjhunwala, if a buying is made they trade at their lowest. Hence, right now is the time to buy!
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