City Union Bank may hit Rs 105: Daljeet Singh Kohli

Daljeet Singh Kohli of India Nivesh Securites told CNBC-TV18, "In City Union Bank, the rational that we found was very compelling. It is a bank which is working more like NBFC. It is not beleaguered with all kinds of problems that banks are going through but it is actually working more like an NBFC where the loan book is granular in nature, they give loans to small corporate, wholesalers, traders, etc. The average size is around Rs 30 lakh. The risk of those going bad is much lesser.""Their gross NPA is also quite low as compared to their peers like Karur Vysya Bank, Federal Bank and others. This they did in last one-and-a-half years when they consciously took a decision not to grow their book too much on the corporate side, so the contribution of corporate side has come down.""The other important thing to note for City Union Bank is that they have nil provisioning required for 5/25, refinancing, all kinds of RBI mandated requirements for provisioning. So they are actually immune to all of that which was an important factor at this point of time because all the banks are going through that big problem and this bank is out of that," he said."In terms of valuation, it is trading at 1.6 times. The only caveat here is that they have a small CASA, as compared to their peers, they have a CASA ratio which is very low but that is because they were not growing into corporate segment, which is a good thing at this point of time. So they are trading at 1.5-1.6 times with RoE of around 18 percent, RoE of more than 1. I think it deserves a better valuation. We have given a target price of Rs 105 and being on the conservative side which will be again reviewed," he added."Majesco warrants a re-entry and we have now included it into 20-20 series which is what is going to change in the next four-five years for this stock and you should be invested in this stock for that period." "We started this stock when it was a combine entity of Mastek. However, it got demerged, at Rs 300 it got listed. We have been continuously positive about it. The basic rational to remain in the stock that company is doing all the right things which will lead to huge differential in valuation between its nearest peer which is guide by and itself. Right now it is trading around 1.5 times of enterprise value (EV) to sales of FY18; FY18 is one time, FY17 it is 1.5 times or so whereas Guidewire trades at 8 times.""Of course, there will be a difference between these two because Guidewire right now is USD 300 million company and this is a USD 100 million. However, what we are building in our estimates is that in next two years this company will also reach USD 250 million and we have seen this study in the last eight-ten years for Guidewire and other competitors - that once they reach above USD 100 million then the EBITDA margins pops up, the company comes into huge profit, net profit margin goes to 8-10 percent, EBITDA margin goes to around 20 percent. Right now this company's EBITDA margin is 12 percent," he added. "Once these numbers will start showing in next two years, what will make these numbers show. The company has been continuously hiring high quality sales and staff, they have been adding clients, for example earlier they had only 80-90 clients, now they have 150 clients. So there is a regular increase in the client numbers. They are continuously coming up in rankings; they are coming in top rankings. So all this is making us believe that these numbers are achievable and once these revenue and EBITDA numbers come in then this valuation of one time and eight times will narrow down. So in next five years even if this goes to three times then the stock will be around Rs 1,700. We have given two targets. One is Rs 899 on FY18 basis and on FY20 basis is around Rs 1,690."