DCB bank and IndusInd bank are the two banks that many analysts and brokers are up beat with its performance and are advising to buy or hold these stocks. IndusInd bank is also being compared with Yes bank and is considered as the next “home run” stock.

But is it worth to buy any of these two stocks today?

Before we had into the valuations, let us look at the important attributes of both the banks from its half yearly results so far:

1st Half – 2017 DCB Bank IndusInd Bank
Loan Book Growth (Yearly) 29.12% 26.38%
Net Interest Margin (Yearly) 4.15% 5.02%
Non –Interest income growth (Yearly) 8.89% 25.77%
Cost Growth (2017) 10.50% 26.29%
Asset Quality Net NPA – 0.84% Net NPA – 0.37%

 

If we look at the above table, it gets clear that IndusInd bank business looks more attractive than DCB. Well, we know that IndusInd bank is far bigger than DCB with its market capitalisation of Rs 69,547 crore compare to DCB’s market cap of just Rs 3,488 crore (Almost 20 times).

indusind-bankBoth the banks are growing their loan books at attractive rates with healthy Net interest margins (NIM). Non – interest income for IndusInd bank is growing at far attractive rate compare to DCB. Also, every rupees one hundred reinvested in both the banks, DCB is converting Rs 10.50 as profits, whereas, IndusInd bank is converting Rs 26.29 as profits (Cost Growth). So definitely investors will opt to invest in IndusInd bank rather than in DCB. Also IndusInd should trade at more premium to DCB on valuations looking at these figures.

DCB is expecting its earnings for 2017 in range of Rs 6 – Rs 7.7 per share. Its share price today is trading at Rs 123 per share, if we assume they will report their final earnings at upper level of its forecast then it is trading at 16 times PE ratio and almost 1.73 times to its expected 2017 book value.

IndusInd bank, on other hand, analysts are expecting its earnings for 2017 in range of Rs 47 – Rs 51.51 per share. If we conclude that its earnings for this year will be on the upper side of the spectrum, then it is trading today at 23.43 times to its price to earnings ratio (PE) and 3.42 times to its expected 2017 book value.

Yes bank’s market cap is around Rs 51,000 crore, close to IndusInd bank, so many analysts are saying today that both of these banks look attractive to buy. But, which one is cheaper? Yes Bank’s cost growth for 2017 is expected to be 27.37%. This means every rupees one hundred reinvested in this bank, it is able to convert Rs 27.37 as profits, little better than IndusInd bank. Yes Bank today is trading at 15.94 times PE ratio (lesser PE ratio of DCB) and 3.17 times to its 2017 expected 2017 book value.

Looking at the above figures, definitely investors will prefer Yes Bank to invest with and we can conclude that of the three banks IndusInd bank is looking for expensive.

Now here is a twist, we think that Yes bank is trading almost 25% premium price today compare to our way of intrinsic value calculations.

What are you doing with all the above three stocks? We hold Yes Bank in our portfolio and the reason is because we had invested within it looking at 2018 valuations and not 2017, and it is still trading within its 2018 valuation spectrum.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we tell you to take professional advice before going ahead with our views.