A stock is said to be an “undervalued” one when the basic valuation ratios, viz, the price-to-earnings ratio (P/E) and price-to-book value ratio (P/BV) are lesser than the industry average.
Listed below is one such undervalued fundamentally strong stock that gets a buy call with a potential upside of more than 25 percent:
City Union Bank Limited
With a market capitalization of Rs 9,000 crores, the stocks of City Union Bank Limited are currently trading at Rs 122.75, gaining around 0.40 percent as compared to the previous close of Rs 122.25 apiece.
The P/E ratio of the Bank is 9.64 as compared to the industry P/E of 12.8, and, the P/BV ratio of 1.21 as compared to the industry P/BV of 1.71. Due to the same, the Bank’s stock is said to be trading in an “undervalued” zone.
The Bank, in recent quarters, improved its position marginally as far as the total income and net profits are concerned. The total income increased from Rs 1,423 crores during the March 2023 quarter to Rs 1,457 crores during June 2023 quarter, and, the net profits rose slightly from Rs 218 crores to Rs 227 crores during the same time period.
Moreover, the Bank has been able to report a healthy net interest margin (NIM) of 3.24 percent during FY22-23, as compared to 3.11 percent during FY21-22. Moreover, the return on equity (RoE) as well as return on capital employed (RoCE) with the former moving up from 11.54 percent during FY21-22 to 12.57 percent during FY22-23, and, the latter moved up from 2.67 percent to 2.81 percent.
On a contrasting note, the gross, as well as the net amount of non-performing assets (NPAs), rose during the timeframe mentioned above with the former moving up from Rs 1,920 crores to Rs 2,081 crores, and, the latter taking a shift from Rs 1,017 crores to Rs 1,038 crores.
Having a positive outlook, HDFC securities gave a ‘Buy’ recommendation for the Bank’s stock with a target price of Rs 160 indicating a potential upside of 30.3 percent as compared to the prevailing stock prices.
The rationale behind providing such a recommendation pertains to the stable NIMs, optimistic attitude toward the improvement of gross & net NPA scenarios, adapting to new growth strategies, etc.
City Union Bank Limited, a Private Financial Institution based in India, is engaged in the business of providing Banking products & services to various individuals and corporations.
The Bank operates through four broad segments, i.e., Corporate banking, Retail Banking, Treasury, and other Banking operations.
Written by Amit Madnani
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