Jhunjhunwala stock: CLSA expects bank to pluck low-hanging fruit, calls its 'inexpensive'

Federal Bank shares have received a buy call from global brokerage CLSA. Initiating coverage on the banking stock, CLSA said the bank is eyeing return metrics closer to those of the six large private sector banks as new CEO and MD has taken charge recently.

Federal Bank appointed KVS Manian as the new Managing Director & CEO with effect from September 23 2024, succeeding Shyam Srinivasan.

"While the near-term outlook is muted, we expect the bank to pluck low-hanging fruit and improve returns over the next three years (14% ROE in FY27/28CL versus an average of 11% over the past decade). The stock is inexpensive at 1.1x PB/9x PE (FY27). We initiate coverage with an O-PF rating and TP of Rs 230 (1.4x PB)," said CLSA. 

On the asset quality, CLSA said the lender has a 'low-risk, low-return' lending model. 

"Its average credit cost over the past decade is only 0.8%, which is much better than even some of the larger private sector banks. Unlike some private sector banks, Federal sailed through the corporate credit crisis of the past decade with minimal impact," the brokerage noted.  

In the current session, the stock of the Kerela-based lender ended 0.59% higher at Rs 195.35 against the previous close of Rs 194.20 on BSE. The stock hit a record high of Rs 216.90 on December 5 this year.

Rekha Rakesh Jhunjhunwala, wife of late investor Rakesh Jhunjhunwala, held 3.45 crore shares or 1.42 per cent stake in the private lender at the end of December 2024 quarter. 

Market cap of the bank on Friday stood at Rs 47,955 crore. The banking stock has a one-year beta of 0.9, indicating low volatility during the period.

Total 3.91 lakh shares of the bank changed hands amounting to turnover of Rs 7.62 crore on BSE.

In terms of technicals, the relative strength index (RSI) of the stock stands at 61.1, signaling the stock is trading neither in the oversold nor in the overbought zone. Federal Bank shares are trading higher than the 5 day, 20 day, 50 day, 100 day and 200 day moving averages. 

Federal Bank's net profit slipped 5% to Rs 955 crore in the December 2024 quarter compared with Rs 1007 crore in the year ago period. Asset quality, however, improved with gross non-performing assets ratio falling to 1.95% in Q3 from 2.29% a year ago. Net NPA ratio stood at 0.49% against 0.64%.