Snapshot
Jammu & Kashmir Bank has emerged as one of the handful (quasi) Government Banks to have registered consistent growth in earnings while maintaining the asset quality. We expect this to lead to a re-rating in the stock price.
Investment Rationale Strong performance to lead to re-rating: The Bank has reported a consistent growth in financial performance with Net Interest Income and PAT registering a growth of 19.1 per cent and 24 per cent respectively during FY’07-12 period. The Bank has strong return ratios with a RoE in excess of 20 per cent and RoA in excess of 1.5 per cent.
Play on the economy of J&K: Being a dominant player in the state of Jammu & Kashmir, the Bank should mirror the performance of the state’s economy, which is showing signs of stability.
Adequately funded to pursue future growth opportunities: Jammu & Kashmir Bank is adequately funded to pursue future growth opportunities over the next 2-3 years.
Consistent dividend pay-out ratio: The Bank has a consistent dividend pay-out policy. J&K Bank distributes ~20 per cent of the earnings as dividends. Extrapolating this trend, we expect the dividend to be minimum Rs.40 for FY’13E and Rs.48 for FY’14E.
Valuation & Recommendation
Jammu & Kashmir Bank posted Net Interest Income of Rs.1089 crore compared to Rs.871 crore, an increase of 25 per cent y-o-y. The Bank registered a pre-provisioning profit of Rs.837.8 crore compared to Rs.629.1 crore, an increase of 33.2 per cent y-o-y. Profit after tax for H1FY’13 stood at Rs.515.6 crore. EPS for the half-year stood at Rs.106.4.
Considering the improving prospects, consistent growth in earnings, we expect a strong re-rating in terms of valuation. We value J&K Bank at 1.45x FY’14E adj. book value to arrive at a price target of Rs.1710 over the next nine months (an upside potential of 22 per cent).
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