Why value investors fancy J&K bank

Despite short-term setbacks, the long-term outlook doesn’t seem too dire for J&K Bank

Source: BSE India, Valueresearchonline

Mushtaq Ahmad had never seen such devastation in his entire life. The recent flash floods in Jammu & Kashmir that swept through 20 of the 22 districts in the state have wiped out over 5,700 villages and uprooted over 15 lakh families, besides destroying hundreds of livelihoods and business establishments. Ahmad has not lost anything personal, but as the chairman and CEO of the state’s biggest lender, J&K Bank, the pain is official.

The reason: the 75-year-old bank, in which the state government holds a 53% stake, has 45% of its commercial advances tied to establishments in the state. Besides, two of its big corporate clients — REI Agro and HDIL — have turned out to be NPAs, a big reason why the stock fell out of favour with the Street since the development was leaked by a local newspaper last May. The market’s fears have not been unfounded, as the gross NPA has increased from 1.7% as of FY14 to 4.2% as of June 2015.

Thanks to all this stress, profits declined 58% to ₹130 crore in the first quarter of the current fiscal. In a triple whammy, rating agency Crisil downgraded the bank’s fixed deposits from ‘AA+/stable’ to ‘AA/negative’ in the wake of the stress in the asset quality and its fallout on the bank’s profitability.


Efficiency stakes

The bank enjoys high employee productivity compared with its peers

Since the adverse turn of events that began early last year, the stock has fallen 34% to ₹137 as on November 10. But these adverse developments have led deal-hungry investors to pile on to the stock, which is now trading at 1X its book value and 6X its current year estimated earnings. In fact, if one invests at the current market price, the dividend yield alone works out to 3.5%. Not surprising, then, that contrarian value investors fancy the stock. Apart from several renowned mutual funds, Parag Parikh’s Long-Term Value Fund among them, well-known US-based value investor Mohnish Pabrai holds a 2.56% stake, valued at ₹174 crore, through Pabrai Investment Fund. Pabrai’s stake was noticed for the first time in the September 2014 quarter, during wh


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