Monopoly Bank in India?? Jammu and Kashmir Bank

Jammu and Kashmir Bank (NSE:J&KBANK)

Business Overview:

Incorporated in 1938, J&K bank is promoted by the government of Jammu and Kashmir State which holds 53.17% stake in the bank. J&K bank functions as a universal bank in Jammu and Kashmir and as a specialist bank in rest of the country. It carries out all the banking business of the central government besides collecting taxes for Central Board of Direct Taxes in J&K.

J&K bank follows a 2-legged business model whereby it seeks to increase lending in its home state, which results in higher margin despite lower volume and seeks to capture niche lending opportunities in other states to build volume and margins.

It operates in four segments: treasury, corporate/whole sale banking, retail banking and other banking business.  The Bank’s investments are classified into held-to-maturity, available-for-sale and held-for-trading categories. The Bank established 92 new branches in 2014, thereby taking the number of branches to 777. The bank also added 187 new automated teller machines (ATMs) both onsite and offsite. The J&K Grameen Bank is the regional rural bank sponsored by the J&K Bank. J&K bank is listed on both NSE and BSE and has a track record of uninterrupted profits and dividends over 4 decades. It is rated as A1+, FAA+ including the highest degree of safety rating by CRISIL.

Bank's Mission:

"Our mission is two-fold, "To provide the people of Jammu and Kashmir international quality financial services and solutions and to be super specialist bank in rest of the country". This strategy is intended to make us one of the best banks in the country." – Annual Report 2014

Dominance:

J&K bank holds 65% of total bank deposits in the state which talks about dominance vs the competition. The bank also has a market share of 67.5% of housing loans and 75.9% of agriculture loans in the region. Dominance comes with responsibility and brings the possibility to earn good return on invested capital. Imagine competing with such a dominating player in a highly regulated industry like banking.  Getting a new banking license in India is very difficult as there are only 2 new licenses are given in last 10 years.

Quality of the bank:

By the below metrics, the bank displays all the elements of excellent banking starting from attracting low cost deposits, high return on assets, high net interest margin and high Return on Equity. Book value per share is not adjusted for the stock split (10 for 1).

Management capability:

This bank is a government controlled bank with a profitability metrics of a private bank. Return on Assets have been over 1.5% (very few banks in US achieve this), Return on Equity is over 20% (almost no bank in US achieve this), book value per share increased over 20% historically, conservative dividend payout of 20% and reinvesting the remaining 80% of earnings back into the business. Net Interest margin is highest (4.1%) in the industry and Capital Adequacy Ratio under Basel III stood at 12.69% as of March, 2014 well above Reserve Bank of India stipulated norm of 9%. Mr. Mushtaq Ahmad is a chairman and CEO of the bank, has more than 41 years of experience in finance and in corporate/retail banking.

Historical Financial Overview:

Valuation:

This excellent bank is selling in the stock market today for 6500 Cr (Rs. 135/share), which is less than 6 times after tax earnings (~1200 Cr) and about 1 times book value (liquidation value). The best days of banking and India’s growth are still ahead. To interpret the numbers per branch, Average branch has approximately Rs.88 Cr ($14M) in Deposits and the market price of the bank is Rs.8 Crs ($1.3M). We don’t have to be geniuses to figure that the deposits at these branches are going to grow at reasonable rates, and so is the lending since the economic activities in India have more room to grow. We don’t need to be precise about the growth rate as we are not paying anything for the growth. Based on the market price today, the shareholder gets paid about 15% in earnings yield and 3.75% in Dividend yield. This is a very attractive valuation for a dominant bank. Let’s play with some numbers with various assumptions:

Rate of growth in Earnings (%)	Earnings in 5 years (Crs)	P/E multiplier	Market Cap potential (Crs)	Stock Price (Rs)
10	1932.612	10	19326.12	399.3
15	2413.628625	15	36204.42938	748.0254
20	2985.984	20	59719.68	1233.8777

Various stock price potentials in next 5 years measure well against the current price of Rs.135.

Major Owners of this company (other than the state):

Name of the Shareholder	Total Shares held	Shares as % of Total No. of Shares
Aberdeen Global Indian Equity Fund Mauritius Ltd	17180000	3.54
The Pabrai Investment Fund LP	12432560	2.56
Route One Investment Company L.P A/c Route One Fund I L P	8757700	1.81

Conclusion:

This investment opportunity measures well against my criteria’s,

Strong/dominant business with great economics and huge growth opportunities ahead P

Run by proven management with strong capability P

Selling at a price which is cheap relative to the current earnings and future potential P

Disclosure:

I/partnerships managed by me own shares in this company.

Best run private bank in India?? South Indian Bank Limited (NSE: SOUTHBANK)

 Banking:

Banks accept various forms of deposits from their customers for X% of interest, and lends it back to the customers at Y% interest. The difference between Y and X is the spread, which is used for all the expenses like employee costs, branch leases etc. After all the expenses, an average bank makes about 1% of total assets per year which can be distributed to shareholders or invested in more branches and loans.

South Indian bank has 801 branches and 1020 ATMs across India. It is the second largest private bank in Kerala. The bank has 86 years of operational history. It is also a pioneer in technological development in terms of serving customers needs. South Indian Bank Limited (the Bank) provides retail and corporate banking, as well as other banking activities, such as debit card, third party products distribution like insurance and brokerage operations.

Number of branches per state:

Andhra Pradesh 48	Gujarat 18
Maharashtra 30	Rajasthan 2
Assam 2	Haryana 4
Meghalaya 1	Tamil Nadu 137
Bihar 1	Himachal Pradesh 1
Mizoram 1	Tripura 1
Chandigarh 1	Jammu & Kashmir 1
Nagaland 1	Uttar Pradesh 9
Chattisgarh 3	Jharkhand 2
Orissa 2	Uttaranchal 1
Delhi 24	Karnataka 43
Pondicherry 2	West Bengal 16
Goa 5	Kerala 439
Punjab 4	Madhya Pradesh 2

Qualitative aspects of the bank:

Growth & Profitability:

Total deposits have grown 3 times over the last 6 years,  24.45% per year; Profit after tax growth of 26.45%; improving asset yield as bank builds fee income streams in addition to interest income. Profitability of any bank can be identified by return on total assets; South Indian Bank makes more than 1% of the total assets consistently.

Low cost funding growth:

Low cost funding (interest rates on deposit base) is the recipe to have better profit margins and return on total assets, bank identifies them clearly & they have implemented specific strategies to achieve low cost deposits.

Asset Quality:

Higher asset quality; Gross Non Performing Assets at 1.57%, Net Non Performing Assets 1.12%

Employees:

Young workforce (avg. age of 34 years) with continuity of management and only 2 CEOs in the last decade

Private bank advantage:

Private banks in general don’t have legacy issues and poor quality loans as in many of the Public/government controlled banks.

Shareholders:

Strong shareholders with a long term perspective can be a huge advantage; here are the biggest shareholders with a long time horizon for investments:

1 First Carlyle Ventures Mauritius 4.94%

2 India Capital Fund Ltd 4.65%

3 LIC ltd 4.44%

4 Multiples Private Equity FII I 4.03%

5 GKFF Ventures 3.85%

Successful investor Mohnish Pabrai recently bought about 2% of the company at Rs.32.5/share.

Valuations:

The current market capitalization of South Indian bank is 3700 Crs (Rs.28/share). It makes income about 1000 Crs before tax and provision. Net of tax, the company makes about 500Crs. This means, you are effectively buying this bank at 7 times after tax earnings this year. The dividend is 108 Crs, payout ratio of 20%.

Taking number of branches into account, it means every branch is valued at about 4.7 Cr in the market today. It means, based on the latest quarter’s profit, each bank makes about 60 lacs/year after tax.

Here are some of the financial metrics:

P/E – 7; Earnings yield – 14.3%

Market cap/Total assets – 0.071

Market cap to Total equity (M.cap/Book value) – 1.1

Long term debt/Equity - 0.80

Risks:

Banks are leveraged institutions; Loan losses could potentially be a life threatening risk for any bank. But, South Indian bank makes Rs. 1000 Crs of pretax and pre-provision income every year; they can handle almost 3% of their assets loss, which is 3 times the current loss provision.

Banks are also very much influenced by government policies and interest rate settings by RBI in India. To have a good economic development in any country, banks should be in the forefront of prosperity. As we all know economic development in India is still a long road, South Indian Bank should be a net beneficiary of this development.

Conclusion:

Banking in India is very well developed (safe), poised to grow revenues/profits in coming years. Imagine how many people in India don’t have bank accounts and salary is not deposited directly to the bank compared to other parts of the world. Banking is a sticky business; I don’t know a lot of people who moved from one bank to another many times in their lives. The opportunities for South Indian bank are huge and many of them are yet to develop,

1. Customers growth as the banking is only moderately penetrated in many parts of the country.

2. Growth in deposits per customer as they make and save more money.

3. Debt/capita is very low for Indian consumers, discretionary income increases should lead to loans/investments.

4. Shift from local lending (pawn shops, local finance companies) to bank lending due to the cheaper lending rates, better technology implementation. Obtaining a loan from banks is getting much easier now.

5. More service based revenues such as in insurance, brokerage, bill payments and wealth management etc.

Here we have a conservatively managed bank poised to grow their net income in coming years and selling in the market for 7 times of after tax earnings. So, the initial yield on our investment is more than 14%.

Disclosure: I/partnerships managed by me own shares of this company.

Tender Offer / Management buy back - American Realty Capital Healthcare Trust Inc

AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC

If you want to make little less than a hundred dollars on a ~$1000 investment almost risk free, read further.

The opportunity is to buy 99 shares of AMERICAN REALTY CAPITAL HEALTHCARE TRUST, INC(NASDAQ: HCT), and ask your broker to tender all the shares in management tender/buyback @ $11/share. Currently the shares are trading at @ $10.20. so, you pocket the difference between (11 - 10.2)*99, less brokerage costs. This needs to be done before May 2nd 2014. There is a special provision/priority for the shareholders who hold less than 100 shares. Here is the SEC filing of this tender offer which includes the odd lot provisions.

https://www.sec.gov/Archives/edgar/data/1499875/000114420414021248/v373929_exh99ai.htm

Feel free to send this to anyone who would like to benefit from this idea. Let me know if you have any questions.

Tender Offer / Management buy back - Global Sources Limited (Bermuda)

Global Sources Limited (NASDAQ: GSOL)

If you want to make hundred dollars on a ~$400 investment in 2 months almost risk free, read further.

Tender offers usually provide an odd lot provision, which is a priority to buyback less than 100 shares in any shareholders account. The company Global Sources Limited didn't specify this in the SEC filings or in the buyback offer announcement. But, I believe they had something like this as they had done a similar transaction (buy back) in 2010, where they considered 50 shares ownership as an Odd lot.

So, the opportunity is to buy 50 shares of Global Sources Limited (NASDAQ: GSOL), and ask your broker to tender all the shares in the management share buyback @ $10/share. Currently the shares are trading at @ $8.00, you pocket the difference between (10-8)*50, less brokerage costs. Tender offer completes at the end of May 2014. 

You can even do this in multiple brokerage accounts to leverage this idea to enhance your returns on your total invested capital. Here is the announcement of this tender offer.

https://www.sec.gov/Archives/edgar/data/1110650/000095016214000015/ex99_1.htm

Feel free to send this to anyone who may like to benefit from this idea. Let me know if you have any questions.

Disclosure: I own shares of Global Sources Limited.

Super Cheap Indian Steel Pipes Manufacturer - Maharashtra Seamless Limited (NSE: MAHSEAMLES)

Business:

Maharashtra Seamless Limited is an India-based company engaged in manufacturing seamless steel pipes and tubes in India. The Company also manufactures coated pipes and electric resistance welded (ERW) pipes, along with the seamless pipes. The Company has two segments: steel pipes and tubes and electricity. The Company’s product range caters to application areas like oil and gas sector, hydrocarbon industry, boilers and heat exchangers, automotive, bearing and general engineering industries. As of March 31, 2012, the Company commissioned the 6th seamless pipe plant at Mangaon. As of March 31, 2012, the Company had two subsidiaries: Maharashtra Seamless (Singapore) Pte Ltd, Singapore and Maharashtra Seamless Finance Ltd.

Business units and Plants:

Seamless Era and Pipes

Wind Power

Solar Power

Board of Directors:

 D.P. Jindal (Chairman)

 Saket Jindal (Managing Director)

 U.C.Agarwal, P.N.Vija, Sanjeev Rungta and N.C.Jain

Selected figures from financial statements:

Particulars	2004	2005	2006	2007	2008	2009	2010*	2011	2012	2013
Gross Turnover (Rs. Lacs)	55529.00	86724.00	107695	151961	164037	218351	169122	188741	242820	183782
EBIDTA (Rs. Lacs)	10031.00	12851.00	20801.00	34101.00	29762.00	34244.00	39990.00	42331.00	39129.00	17053.00
PBT (Rs. Lacs)	10507.00	12624.00	20685.00	35269.00	30190.00	38503.00	43109.00	49373.00	44258.00	19774.00
PAT (Rs. Lacs)	7146.00	8488.00	13960.00	23384.00	19522.00	25784.00	28459.00	34166.00	31073.00	15332.00
Gross Block (Rs. Lacs)	26709.00	32768.00	35303.00	37416.00	44321.00	51441.00	139084	150008	163593	168703
Net Block (Rs. Lacs)	21970.00	26992.00	28075.00	28579.00	33746.00	39064.00	120783	125758	133257	130670
Equity (Rs. Lacs)	2882.00	2882.00	2882.00	3497.00	3527.00	3527.00	3527.00	3527.00	3527.00	3527.00
Reserves (Rs. Lacs)	21527.00	28399.00	38509.00	88913.00	105814	127472	225230	250389	272454	278745
Net (Rs. Lacs)	24409.00	31281.00	41391.00	92410.00	109341	130999	228757	253916	275981	282272
Book Value (Rs.)	85.00	109.00	144.00	132.00	155.00	186.00	324.00	360.00	391.00	400.00
Equity Dividend (Rs. Lacs)	1153.00	1441.00	2132.00	3720.00	3527.00	3527.00	4232.00	4232.00	4232.00	4232.00
Dividend Per Share (Rs.)	4.00	5.00	7.00	5.50	5.00	5.00	6.00	6.00	6.00	6.00
Earning Per Share (Rs.)	23.72	29.54	48.26	38.38	27.70	36.56	40.35	48.44	44.05	21.74

Valuation & Analysis:

The company trades in the market for around 1100 Cr. Rupees (Rs. 170/share).  The company has excess cash (700 Cr) on their balance sheet, which is invested in various mutual funds. If we exclude the excess net cash, it is trading for less than 3 times of the depressed annual profit & 1/3 of the stated book value, and the RONW is over 15%.  This is a cheap company by any valuation metrics.

Market Cap – 1100 Cr. Net Cash – 700 Cr. Book Value – 3527 Cr

Enterprise value – 400 Cr. Net Profit -152 Cr

Enterprise Value / Net Profit – 2.63

Market Cap/ Book Value - 0.37

The company has a low cost operation which has the benefit of making huge profits when sales go up in the upcoming years. The company’s board authorized a buyback of ~10% of the shares outstanding & the buyback is currently in progress. This is great capital allocation at work. The company also has a policy of paying out 1/3 of the profit as dividends to the shareholders. In today’s stock price, the dividend yield is more than 3.5%. The risk of losing the invested capital for the investor at these prices is almost zero; the business is earning healthy profits on the invested capital with excess capital in the balance sheet. At some point the market participants will come to their senses, and bid up the stock prices relative to the company’s profitability. At that point the shareholders will realize huge profits via share price appreciation. If we are right about the assessment/prospects of the company, the capital will compound at very high rates.

Shareholders:

The company’s promoters hold 55% of the shares outstanding, the remaining float is held by these following funds:

Odd & Even Trades and Finance P. Ltd. - 16.57%

Stable Trading Company Ltd - 16.00%

Brahmadev Holding & Trading Ltd - 8.16%

Global Jindal Fin-Invest Ltd - 7.69%

Franklin Templeton Investment Funds - 7.03%

Risks:

Continuous dumping of steel pipes by abroad manufacturers decreases the revenue & profits of this company.

Disclosure:  

I own shares of this company.