Vijay Kedia’s MultiBagger bet
Ace Stock Picker Vijay Kedia has added more shares of Karnataka Bank this Quarter and now has made this as his 2nd largest holding after Sudarshan Chemicals. He now owns 31 Lakh shares of Karnataka bank. In an Interview to ET now, he said the he believes that the karnataka bank is a 4 bagger in next 3 years.
In the Next 3 mins you will understand why exactly Vijay Kedia is bullish on Karnataka Bank.
Stallion’s View – When we at Stallion buy a bank, we look at the Banker rather than the Bank only. We hold ****** Bank in our portfolio, the real bet is on the banker, we have seen how Chanda kochhar of ICICI has destroyed value in last 8-9 years whereas Aditya Puri of HDFC has made a killing with the right approach. Rana Kapoor of Yes bank and Sobti of IndusInd have delivered mind blowing value though both have different strategies but they both have great credit quality.
There is going to be massive consolidation in the banking industry especially with payment banks, small finance banks etc coming in, this gives us an opportunity to look at small private sector banks like KTK bank, DCB bank, South Indian Bank, City Union bank etc.
So broadly an investor can divide banks in 2 lots 1) Banks with good bankers for long term secular growth like RBL, Indusind, Yes bank 2) Banks which will be acquired sooner or later which are very cheap now like KTK bank.
About Karnataka Bank – Karnataka Bank is one of the oldest private sector banks with time tested history of 92 years. It offers wide variety of corporate and retail banking products and services to ~8 million customers. The Bank enjoys presence of 2,072 service outlets with 738 branches, 1,334 ATMs in 486 centres across India as on Dec 31, 2016. Bank has the strongest presence in South India with 577 branches. Branches of KTK in Top 5 States: Karnataka (458), Tamilnadu (49), Maharashtra (44), Andhra Pradesh (34), Delhi (21)
Lets Understand Karnataka Bank Business – We will look as if we are Acquiring this business, as its an acquisition target.
Factor 1 – Network = Karnataka Bank has 736 branches and 1319 ATM, whereas South Indian Bank has 839 Branches and 1306 ATM’s. They both have a similar balance sheet size of about 90,000 Crores and 1,00,000 respectively whereas both CUB and DCB are small in reach and Size.
Factor 2 – How much CASA do they have?
CASA is important as it shows how many retail customer does the acquiring company get, as mentioned before Karnataka bank has 80 lakh customers. As on 30/9/2016 (Pre-Demonetization), Karnataka bank had a CASA of 26.3% which is better than peers at 21-22% making it a better acquisition target compared to others
Factor 3 – Valuation – Karnataka Bank has a Market cap of 3891 Crores whereas south Indian Bank has a market cap of 3107 Crores which is cheap considering their balance sheet size of 90000 Crores and 104000 Crores respectively. They both are trading cheap because they have gross NPA’s between 3.5-4%. The Asset quality of DCB and CUB is a lot better as Gross NPA’s stand at 1.75% and 2.69% respectively. Karnataka bank and South Indian bank trade at a P/B at 0.66 and 0.68 respectively whereas DCB and City Union trade at 2.36 and 2.64 respectively.
* note the Book value of KTK bank has changed this quarter to 180 per share due to its right issue. We have used pre-rights data just for comparison purpose
Adjusted Book Value – We believe the Correct way to value Karnataka bank would be Adjusted book value. As per our conservative estimates the Adjusted book value per share of Karnataka bank is 155 per share after adjusting for right issue. The CMP is 135, is 0.87 Price to Adjusted Book.
Vision 2020 – As per the Karnataka Banks Vision 2020 document, Bank`s total business turnover is projected to increase in a progressive manner to touch 1,80,000 crore from 85000 crores in FY2016 growing at 21% with deposits of 1,00,000 crore in 2020 from 50500 Crores in 2016 growing at 19% and advances of 80,000 by March 2020 from 34000 crore in FY 2016 growing at 24%. We at Stallion Asset believe that these estimates will not be met but the bank will grow at 10-15%
Conclusion – We believe that this bank might be acquired in next 2 years at 2-3 x Adjusted book value, it would be a great add to any large bank. South Indian bank also looks good on Valuation and very limited downside risk whereas upside can be 2-3x in next 2-3 years.
Disclaimer – We Don’t have positions in Karnataka Bank. Use this for education Purpose only.
