Q2FY16 Result Was Not Perfect & Way Below Street Estimates And The Stock Crashed
Q2 PAT at Rs.161 cr, down by 32.8% (YOY-240 cr) against estimate of 290.50 cr
Q2 EPS as 0.94 against estimate of 1.70 (YOY-1.40)
55-48 Might Be Proved As Very Good Demand Zone For TGT Of 68-80
CMP: 57
Buy around: 55-48
TGT: 68-80 (1-12M)
TGT: 90-100 (24M)
TSL<40
Note: Consecutive closing below 40 for any reason, FB can fall up to 35-25 zone, where it may be again accumulated for better investment buying average.
Some key takeaways :
FB "surprised" the street with a very disappointing Q2 earnings down almost 33% YOY on higher provisions for few large corporate loan accounts stress under restructured assets (CDR- Metal & Power sectors). As par reports, Essar Steel & Ratnagiri Power may be those two CDR accounts.
Provisions & contingencies jumped by almost 91% to Rs.87.28 cr (YOY-45.7) and on net NPA front, the bank scored quite badly. NIM was also flat.
Going ahead, the bank is optimistic for a turnaround and timely resolution of its NPL(s) including the above CDR accounts as most of them are "well collateralised".
The bank is also targeting 15% credit growth in FY-16 from the present level of 5% (YOY) and is quite confident about the MSME sector and hopeful about corporate credit growth.
The bank has around 1250 branches all over India and 65% of those are in semi-urban, rural & non-metro locations and the management is confident about competing with new entrants (small & payment banks).
FB is also foraying big into digital banking called "Selfie" and is confident that it will increase its CASA ratio quite substantially.
But analysts are not so confident about the management commentary and has downgraded the stock from previous 80-90 target to 70-80 now (From Buy To Hold/Accumulate/Neutral rating).
QOQ numbers is not so "shocking" as Q2FY16 PAT of 161.28 has been grown by around 14% from Q1FY16 PAT of around 141.39. Net provisions are also down by almost 42% to 87.28 from 153.10 (QOQ).
In any way, the result of FB undermines the vulnerability of small banks to "large" corporate loan accounts (above 25 cr). Sudden stress of few hundred crores may wipe out these small banks.
There will be around twenty one new players entering in to differentiated banking in India shortly (payment & small banks). Certainly competition will increase sequentially higher and companies having very deep pockets may be able to survive in the game only.
Full banking is not so easy and India is not a place for so many banks to survive.Thus M&A will inevitably happen in the banking industry in the years ahead and all small banks including FB may be one of them (M&A candidate !!).
Quite a few of the new banking entrants are large corporate groups & "startups" flush with funds. At certain point of time they, as well as the new banking aspirants want to grow either organically or inorganically and that may change the rule of the game.
Small Banks & Payment Banks can take away some loan & CASA accounts from some full fledged banks in future but at this point of time its too early & premature to judge and its not possible for a partial bank to compete with a full bank because of the limitations of service availability with a partial bank vis-a-vis a full bank.
As par some estimates, there might be around 10% effect on NIM for this issue in future on the part of some full fledged banks and various full banks are tying up with payment banks for mutual benefit. We can see similar trends in the case of small banks also to avoid direct intense competition.
Now, technically for FB, below estimate Q2FY16 result "shocker" may be already discounted to a great extent by the market and considering the favorable risk/reward ratio 55-48 range might be a good buying zone for it and it may be another instance of "buying a good business in temporary distress".
As par BG metrics & current market parameters:
Present median valuation of Federal Bank may be around : 75 (FY:15)
Projected fair valuations might be around: 80-90-100 (FY:16-18)
| SCRIP | EPS(TTM) | BV(Act) | P/E(AVG) | Low | High | Median | 200-DEMA | 10-DEMA |
| FEDERALBNK | 5.77 | 88.09 | 15 | 75.78 | 74.32 | 75.05 | 66.35 | 63.82 |
| FEDERALBNK | 6.65 | 98.25 | 15 | 81.35 | 79.79 | 80.57 | 66.35 | 63.82 |
| FEDERALBNK | 7.75 | 109.75 | 15 | 87.82 | 86.13 | 86.98 | 66.35 | 63.82 |
| FEDERALBNK | 9.5 | 122.25 | 15 | 97.24 | 95.36 | 96.30 | 66.35 | 63.82 |
Analytical Charts:
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