This Rakesh Jhunjhunwala stock is set to rise by 24%: Should you buy?

The share price of Federal Bank on Tuesday plunged by nearly 2% after touching an intraday high of Rs 96.05 per piece. However, at around 1415 hours, the bank was trading at Rs 96.10 per piece down by 1.89% on Sensex. Investors' faith in Federal Bank looked bleak, despite benchmark indices witnessing massive buying. However, with Federal Bank’s extensive selling pressure, even Rakesh Jhunjhunwala faces heat as he has bet massively in this lender. Apart from Federal Bank, Jhunjhunwala also holds hefty portion of Karur Vysya Bank. But in Q3FY19, he decided to increase his holding most in Federal compared to other stocks that he has. Considering Jhunjhunwala’s investment in stocks does not see momentary lapse, however, aims for bigger picture. And in long term, Federal Bank is set to make Jhunjhunwala rich. 

Hatim Broachwala and Neelam Bhatia analysts at IDBI Capital said, “Under leadership of  Shyam Srinivasan heading since FY10, the bank has embarked on its journey to transform into a pan India bank. While the bank remains in a dominant position in Kerala, incremental growth will be driven from Non-Kerala geographies. Asset quality challenges are behind and bank is well placed to capitalize on likely economic recovery. Credit growth momentum is expected to continue, with tilt towards higher yielding segments.”

Giving a buy rating on Federal Bank, the duo at IDBI listed out three key factors to note while investing in this bank.

1. Credit growth momentum to continue, realignment in favour of higher yielding products to aid NIMs:

Loan book has grown at a CAGR of 25% during FY16-19. Management has guided for similar growth momentum to continue. With large part of the asset quality issues behind, bank is geared up to realign its portfolio in favour of higher yielding segments like unsecured retail, commercial vehicle and business banking. 

As a result, IDBI expects NIMs to improve by 5bps every year and Riskadjusted NIMs (adjusting for slippages) to improve by 15bps every year. 

2. Asset quality challenges are behind, particularly from corporate segment:

Bank has been quite aggressive and proactive in recognizing stress including impact of asset quality review and last year’s February 12 circular. Also Impact of Kerala flood was front loaded in the last 2 quarters. Its corporate book rated A and above portfolio has improved to 72% from 27% in FY13. Slippages within corporate segment have halved to 1.2% in 9MFY19 from last 5 year’s average of 2.4%. Restructuring assets have declined to 0.6% from 5.7% in FY14.

With no large standard account currently under stress, IDBI factors GNPA and credit cost to ease by ~30bps each during FY18-21E to 2.7% and 0.6% respectively.

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3. Strong improvement in return ratio’s:

On the back of healthy credit growth, improvement in NIMs, contained operational as well as credit cost, analysts at IDBI are factoring ROA/ROE expansion of 30/430 bps in FY18-21 to 1%/12.6% respectively. 

Hence, Federal Bank is well placed in future and will add more money in Jhunjhunwala’s kitty. As on December 2018, Jhunjhunwala holds about 3.45% with 67,471,060 equity shares. He increased his stake in Federal by 1.71% in that quarter.

Where is Federal Bank headed? 

The duo at IDBI says, “We are factoring next two years CAGR loan growth of 23% and PAT growth of 34%. We initiate coverage on Federal Bank with a ‘BUY’ rating and TP of Rs120.”

If we take current market price, then Federal Bank is set to make many richer by a whopping 24% in just 1 year’s time.