Is it a good time to sell or hold JK Bank?

I wanted to pen down my views on when to sell any stock next week when we report the portfolio returns next week for the month end May 2016. But today we got this real life opportunity to explain you when should you sell any stocks.

Most of the research conducted revel that retail investors sell stock at low and buy at high price i.e. they buy stocks when they are trading at higher levels and sell them when they fall down. If you are visiting our blog from last two years, you might have read many post where we have been talking about how JK Bank is trading at cheap valuations.

Our valuations were based on consensus earnings report where there were 9 analysts following JK Bank closely and were expecting better profit numbers from its 2015 results. But the trend of falling profits had not turned around in 2016 as expected and all the analysts failed to predict its earnings for this financial year by big margins.

Before getting into JK bank financials, let me share with you when we sell any stock. You have never made profits until you have sold. And this rule applies to even our A1 stocks. Over the long period of time price of any business follows its intrinsic value and if you don’t know the intrinsic value then the rules ‘when to sell’ I am sharing with you today will not work.

Apart from being wrong and rebalancing our portfolio, we sell the stocks in these three scenarios:

  1. Quality and performance of the business declines
  2. Intrinsic value of the business decline
  3. Market price rises well above intrinsic value.

In the case of JK bank, intrinsic value of the business is in decline. We valued this business intrinsic value for the 2015 year to be Rs 43 per share and were expecting it to go up to Rs 62 per share on around Rs 600 crore profits. Unfortunately they reported their profits of Rs 416 crore, almost 200 crore rupees short and now we value this business intrinsic value to be Rs 33 per share on 2016 results.

As a shareholder we lost Rs 10 per share business intrinsic value plus by staying invested whole year in this business, we suffered opportunity cost. We could have offloaded earlier and invested that money in better business. We were not investing on hope of turnaround within this business as investing on hope is speculating and we don’t do that.

We were wrong by putting trust in the management that they are prudent with their NPA’s and provisioning. We were convinced by the management that this pain of NPA’s will be under control in next four quarters. They looked on track and doing what they said until their fourth quarterly results for 2016. It was a black swan moment for us when we see Gross NPA’s jumped up by Rs 1,029.16 crore rupees and as per the guidelines of RBI they have to provision that generously, resulting in quarterly loss and missing analysts’ expectations. We were expecting gross NPA’s to shoot up not more than 700 crore and provisions figure not exceeding more than Rs 250 – Rs 275 crore for the fourth quarter.

Our strategy is still to invest for the long term and unfortunately we stayed invested in this business in the period where its intrinsic value is in decline now from the last two years. Its quality ratings are still intact but could fall to A3 or B3 by the end of this year. Staying invested on hope that 2017 will be turnaround in the business profits will be speculative, the NPA figures are coming out far larger than their yearly profits every quarter and it will for the next four quarters.

JK bank reported its net profits of Rs 416 crore for the 2016 financial year down by 18%. Total income from operations were down by 4% to Rs 7347.60 crore. Cost to income ratio stands up to 48% for the 2016 financial year. Gross NPA’s are sitting at Rs 4,368.62 crore or 8.32%.

Deposits have gone up by 5% and advances by 13% to Rs 50,193.29 crore. The return on equity stands at 7% for the 2016 financial year.

On valuations, in our opinion it is trading in range of 20% -25% above its expected 2018 intrinsic values.

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 advise you to take professional advice before going ahead with our views.