J&K Bank - Good bank at great valuations - Prabhudas Lilladher

(PT of Rs1,250/share, ~24% upside)

- Strong liability franchise, with improved focus on growth: J&K enjoys a very strong liability franchise due to its state advantage and management's intended growth acceleration (after five years of consolidation) coincides with a phase of strong economic growth and activity in J&K. With +60% market share in advances and deposits, we believe J&K Bank is best positioned to benefit from strong growth in J&K state.

- Competition will not be disruptive: High CASA + Low operating costs make J&K an attractive expansion opportunity for private banks. However, our feedback from large private banks suggest that competition will not be disruptive.

- More private than PSU bank; Mid-cap PSU valuations unwarranted: Low fees and CA ratio are the only commons (PSUs) , apart from which J&K Bank is more of a private bank on most parameters like high CASA and margins, sound underwriting and high ROAs/RORWAs. Management continuity, which is a big issue with PSUs, is also absent in J&K Bank, with ~5-6 years of average tenure for the Chairman.

- Valuations extremely undemanding: J&K valuations at 0.85x FY14 book is extremely reasonable relative to ROEs of +20% and with limited commonality with PSUs and low Infra risk, we believe market should not peg J&K's valuations with mid-cap PSUs. We base our Sep-13 PT of Rs1250/share on a modest 1.05x FY14 book with possible upsides.

Source : Equity Bulls

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