This is the only stock that had underperformed in our portfolio and against the index as well in the last 2 years.

Let’s have a glance on their quarterly as well as half yearly numbers.

Sep 2014 Quarter Sep 2014 Half yearly March 2014 full year
Interest Earned Rs 1799 Rs 3567 Rs 6767
Other Income Rs 85 Rs 216 Rs 390
Operating Expenses Rs 344 Rs 665 Rs 1175
Provisions Rs 168 Rs 414 Rs 148
Net Profit Rs 172 Rs 302 Rs 1182
Deposits Rs 62972 Rs 62972 Rs 69328
Borrowings Rs 2914 Rs 2914 Rs 1765
Advances Rs 45072 Rs 45072 Rs 46385
Investments Rs 23626 Rs 23626 Rs 26185
Shareholders’ Equity Rs 6026 Rs 6026 Rs 5722

 

Let me not make this numbers confusing and explain you exactly where the money is going within this business:

Sep 2014 Quarter Sep 2014 Half yearly March 2014 full year
Total Income 100% 100% 100%
Interest earned 98% 94% 95%
Other Income 2% 6% 5%
Interest expended 59% 59% 57%
Operating Expenses 18% 18% 16%
Provisions 9% 11% 2%
Taxes 5% 4% 8%
Net Profit 9% 8% 17%

 

The profit margins of Jammu & Kashmir has halved from last year because of provisions they have to write down for their bad loans.

The return on equity calculated as per DuPont analysis for March 2014 looks like this:

1182/7157* 7157/78613 * 78613/5722

= 0.17 * 0.09 * 13.74

= 0.21 or 21% is the return on equity and for Sep 2014 looks like this:

302/3783 * 3783/73570 * 73570/6026

=0.08 * 0.05 *(2) * 12.21

= 0.10 or 10%

The profit margins as well as weakness in leveraging is affecting their business today. Which is very normal for a bank in the current situation they are facing.

Coming to the valuations and looking at the analyst’s expectations for this bank, without taking in consideration of their recent second quarter results, they all are expecting earnings around Rs 22 per share. We think that will fall down further when all the analyst re-look this bank. Yesterday when we did our homework on this bank, we came to the conclusion that they will report their earnings for the year 2015 around Rs 14 per share.

If we do consider that most pessimistic it could be Rs 14 and most optimistic as Rs 22 and average out to Rs 18 per share then their intrinsic value for 2015 will be Rs 136 and for the year 2016 to be around Rs 150.

If we are right in our calculations (where our success rate is only 50% as per probability) J&K bank will see more weakness for the next two or three quarters.

Happy Investing!!