The current article in this series provides responses related to:
- A reader’s (Hari Balaji) views about South Indian Bank Limited
- A reader’s (Sridhar Govardhanan) views about Nucleus Software Exports Limited
- Use of enterprise value in stock valuation
- Finding opportunities in existing stocks in an investor’s existing portfolio first.
- Reasons for not analysing stocks of banking & financial services on the website
South Indian Bank Limited
Dear Vijay, I have been following your blog for quite some time and I find it extremely educative. Your work is nothing short of being service to society by creating awareness.
Based on you framework, I have analyzed the stock South Indian Bank Limited. Please find below my investment rationale.
- Stock is trading at 0.89 times its book value
- South Indian Bank Limited has good consistent profit growth of 21.21% over 5 years
- It has a compounded annual sales growth of 25.35% over a period of 10 years
- It been consistently paying dividend of over 15 percent in the past 10 years
- It has consistently been improving its EPS
- South Indian Bank Limited has been maintaining a decent Operating margin of a little over 15% on an average
- No negative news about promoters or about the South Indian Bank Limited
- The bank has been consistently gr owing its fee bases income. (Other income)
- At the current market price of ₹24.25, it’s available at a PE of 8.80 which provides decent margin of safety
- South Indian Bank Limited operates in an industry which has a strong entry barrier
- South Indian Bank Limited has been maintaining non-performing assets (NPA) at below industry average
- South Indian Bank Limited has a very strong regional presence in Kerala
- The company has a positive cash flow from operations, the cumulative net profits for the past 5 years is ₹1,937 crores, whereas the CFO for the same period is ₹6,066 crores
Please let me know your opinion.
Hi Hari, thanks for your feedback & appreciation! I am happy that you found the articles useful!
If I see the points highlighted by you about South Indian Bank, it looks great. However, analysis of Banks/financial institutions involves many other factors like asset liability mismatch, sources & breakup of funding profile, capital adequacy ratio & its breakup, NPA movements and other weak credit parameters, borrower wise concentration analysis, which are not readily available in the data sources like screener.
Therefore, due to lack of ready availability of pertinent data, I am not able to provide any opinion about SIB.
However, you may learn more about analysing different industries which are new to you, in the following article:
Nucleus Software Exports Limited
Hi Vijay, I am presenting my views on Nucleus Software Exports Limited. I would be happy to hear your views on my analysis and about your view of future prospects of Nucleus Software Exports Limited.
- Sales Growth was in an increasing trend from 2005-2008. Negative growth was observed during 2008-2011. Nucleus Software Exports Limited started to pick growth around 2013 and has been increasing since then. Sales growth in the last quarter was good
- OPM is also in an increasing trend for last 3 Yr., fluctuating between 15%-20% between (2012-2015).
- NPM is between 17% in last 3Yr.
- Tax % is fluctuating no-line with corporate tax slab.
- D/E is 0, which is really great.
- Debtor days have been reduced from 113 to 43 days. Good sign.
- Dividend payout is constantly good. Recently announced a ₹5/Share dividend.
- Stock is in the process of getting re-rated. Recently, it has had a run-up of prices, which has pushed P/E from 10 to 15.
- Its products are doing very good in global markets. Nucleus Software Exports Limited has showing promising growth.
With its specialization of lending & transaction banking products, Nucleus Software Exports Limited can command a higher P/E of above 25.
Below is an excerpt from Nucleus Software Exports Limited’s recent press release.
“For the 7th year in a row we were ranked as having the world’s best-selling lending solution. In FY2014-2015, Nucleus Software introduced FinnOne NeoTM the next-generation End-to-End Loan Lifecycle Management product that enables innovative banks and finance companies to manage all types of lending from personal and home loans to commercial lending and finance against securities. The new solution uses the latest, proven technology and can be delivered via public cloud, private cloud or on customer’s own servers.”
I am already invested in Nucleus Software Exports Limited for over a year and am bullish on it. I I would like to know your thoughts on Nucleus Software Exports Limited.
I am not taking much consideration on inventory turnover & fixed asset ratio, since it’s an IT company. Please suggest if this is the right approach.
- Also please throw some light of enterprise value calculation. I hear a lot of experts and market gurus talk about on enterprise value and the gap between market-cap and enterprise value of the stock.
- How can one calculate enterprise value and see if the stock is underpriced?
Hi Sridhar Govardhanan, thanks for writing to me. I am happy that you are doing stock analysis yourself. This is the motto of the website.
Enterprise Value (EV) is calculated as (value of equity + total debt -cash). Investors usually compare stocks within an industry by comparing their EV/EBITDA ratios.
Regarding Nucleus Software Exports Limited, I do not track IT/ITeS companies, therefore, would not be able to help you. If you believe that it is a good company, then you should go ahead and invest.
How we invest additional money in our stocks
Dear Sir, Good explanation on when to exit a particular stock.
(Read: When to Sell a Stock)
Your philosophy states very clearly that you invest in the company for its business and management strength and not on the basis of how the stock market views its stock.
If the fundamentals of the company are affected, then there is no reason to stay invested? It is a very good and sound advice.
I think it would be worthwhile if you explain to us: how you keep investing into your small portfolio over a period of time, considering that some of the stocks in your portfolio have done very well and some are still lagging behind purely from the stock markets point of view?
For example stocks like Vinati Organics Limited and Mayur Uniquoters Limited have done well and therefore have become expensive but others are still not expensive by way of PE value.
- How do you channelize your investments in such cases?
- Do you still invest more capital into the expensive stocks or you ignore the expensive stocks and buy into the ones that are still cheap?
- If so, how do you re-balance your portfolio?
That would be very insightful for the new investors like me.
Thanks for writing to me!
We invest additional money in those existing stocks in my portfolio, which are still cheap. When we do not find any existing stock cheap enough to put additional money, then we look for a new stock.
However, we might write a separate article answering your query.
Analysis of Banking Stocks
Hello Vijay, I am big fan of you. I am reading your articles daily at least one. I just want to know one thing from you:
Why are you not analysing any banking stocks? Any particular reason behind it?
Thanks for the appreciation!
The analysis of banks/financial institutions involves many special factors like asset liability mismatch, sources & breakup of funding profile, capital adequacy ratio & its breakup, NPA movements and other weak credit parameters, borrower wise concentration analysis, which are not readily available in the data sources like screener and moneycontrol.
Therefore, due to lack of ready availability of pertinent data, I do not provide analysis of bank/financial institutions on my website.
In addition, the following article will help you: Can we Assess a Bank’s Financial Position from its Reported Financials?
Hope it clarifies.
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- The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
- I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
- Currently, I do not own stocks of the companies mentioned above except Vinati Organics, in my portfolio.