Canara Bank, a public sector bank, presents a mixed investment picture. While it boasts a high OPM of 56.3% and a strong profit growth of 37% CAGR over the last 5 years, the bank’s high debt-to-equity ratio of 15.8 and decreasing promoter holding over the last 3 years raise concerns. The bank’s P/E ratio of 7.59 is lower than the industry median, and its ROE has averaged 10.4% over the past 3 years. Considering the bank’s financial profile, a cautious approach is recommended for potential investors.
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TLDR of the article:
Key Financial Data:
- Market Cap: ₹1,11,560 Cr
- Current Price: ₹615
- High/Low: ₹620/284
- P/E Ratio: 7.59
- Book Value: ₹430
- Dividend Yield: 1.95%
- ROCE: 5.33%
- ROE: 14.8%
- OPM: 56.3%
- Debt to Equity: 15.8
- Promoter Holding: 62.9% (constant)
- Pledged Percentage: 0.00%
Quarterly Results (Q3 FY24):
- Revenue: ₹28,492 Cr
- Profit Before Tax: ₹5,009 Cr
- Net Profit: ₹3,827 Cr
- EPS: ₹20.89
- Gross NPA: 4.39%
- Net NPA: 1.32%
Pros:
- Expected to give good quarter results
- Delivered good profit growth of 37.0% CAGR over last 5 years
Cons:
- Low interest coverage ratio
- Low ROE of 10.4% over last 3 years
- High contingent liabilities of ₹3,15,633 Cr
- Earnings include other income of ₹28,018 Cr
- Promoter holding decreased by 6.40% over last 3 years
Recommendation: CAUTION The company has a higher debt to equity ratio of 15.8, decreasing promoter holding, and high contingent liabilities. While the OPM and profit growth are positive factors, the low ROE and interest coverage ratio raise concerns. The current P/E ratio is lower than the industry median. Overall, a cautious approach is recommended considering the mixed financials.
Company Introduction, Profile
Canara Bank, a premier public sector bank founded in 1906 in Mangalore, has a rich history spanning over a century. The bank operates in various segments, including Treasury, Retail Banking, Wholesale Banking, and Other Banking Operations. As of Q2FY24, Canara Bank boasts a Capital Adequacy Ratio of 13.69%, a Net Interest Margin of 2.80%, a Gross NPA of 4.76%, a Net NPA of 1.41%, and a CASA Ratio of 33.41%. With a market capitalization of ₹1,11,560 crores and a current stock price of ₹615, Canara Bank has delivered a compounded profit growth of 37% over the last 5 years and 98% over the last 3 years. The bank’s Operating Profit Margin (OPM) stands at a healthy 56.3%, and its Earnings Per Share (EPS) has reached ₹20.89 in the latest quarter.
Should We Buy, Sell or Hold This Stock and Why?
Canara Bank presents a mixed picture for potential investors. While the bank’s high OPM of 56.3% and strong profit growth of 37% CAGR over the last 5 years are positive factors, the high debt-to-equity ratio of 15.8 and the decrease in promoter holding by 6.40% over the last 3 years raise concerns. The bank’s P/E ratio of 7.59 is lower than the industry median of 11.42, indicating potential undervaluation. However, the low ROE of 10.4% over the last 3 years and the high contingent liabilities of ₹3,15,633 crores suggest a cautious approach. Considering the mixed financials, it is recommended to exercise caution when considering investing in Canara Bank. Investors should closely monitor the bank’s performance, particularly its ability to manage its debt, improve its ROE, and maintain a stable promoter holding before making a decision.
Vital Company Ratios
For the everyday investor, a few key ratios can provide valuable insights into Canara Bank’s financial health. The Operating Profit Margin (OPM) of 56.3% indicates the bank’s ability to generate profits from its core operations. The Earnings Per Share (EPS) of ₹20.89 in the latest quarter shows the portion of the bank’s profit allocated to each share. The Debt-to-Equity ratio of 15.8 is high, suggesting that the bank relies heavily on debt to finance its operations. This could be a concern if the bank faces financial difficulties. The Return on Equity (ROE) of 14.8% indicates the bank’s efficiency in using shareholders’ funds to generate profits. The Price-to-Earnings (P/E) ratio of 7.59, lower than the industry median of 11.42, suggests that the stock may be undervalued. However, investors should consider these ratios in conjunction with the bank’s overall financial performance and future growth prospects.
Data Summary:
- Promoter Holding: Decreased from 69.33% in Jun 2021 to 62.93% in Mar 2024
- FII Holding: Increased from 3.92% in Jun 2021 to 10.57% in Mar 2024
- DII Holding: Increased from 12.35% in Jun 2021 to 14.39% in Mar 2024
- Sales Trend: Increasing, with a 5-year sales growth of 15.7% and a TTM sales of ₹1,05,537 Cr
- Profit Trend: Increasing, with a 5-year profit growth of 37% and a TTM profit of ₹14,774 Cr
- Debt Trend: High, with a debt-to-equity ratio of 15.8 and total debt of ₹12,37,160 Cr
- Margin Trend: Fluctuating, with a current OPM of 56.3%
- Company PE: 7.59, lower than the industry median of 11.42
- Industry PE: 9.97
- Gap between Intrinsic Value and Current Market Price: Intrinsic value of ₹1,703.14 vs. current price of ₹615
- Market Cap: ₹1,11,560 Cr
- Cash in Hand: ₹10,334 Cr as of Mar 2023
- Dividend Payout: 19% in Mar 2023, up from 0% in previous years
- CWIP: ₹0 as of Mar 2023
Competing Companies and Comparison
Canara Bank’s main competitors in the public sector banking industry include State Bank of India, Punjab National Bank, Bank of Baroda, Indian Overseas Bank, Union Bank of India, and Indian Bank. Compared to its peers, Canara Bank has a lower P/E ratio of 7.59 (vs. industry median of 11.42), suggesting potential undervaluation. Its market cap of ₹1,11,560 Cr ranks 6th among the listed competitors. Canara Bank’s ROCE of 5.33% is higher than the industry median of 4.65%, indicating better efficiency in generating profits from its capital employed. Its quarterly sales growth of 26.29% and profit growth of 24.97% are also higher than the industry medians of 21.34% and 31.91%, respectively. However, Canara Bank’s debt-to-equity ratio of 15.8 is significantly higher than its peers, which could be a cause for concern.
Recommendation: Based on the above data and analysis, the recommendation for Canara Bank is CAUTION. While the bank has shown strong sales and profit growth, its high debt-to-equity ratio, decreasing promoter holding, and higher P/E ratio compared to its intrinsic value suggest potential risks. Investors should closely monitor the bank’s ability to manage its debt, improve its margins, and maintain a stable promoter holding before making an investment decision. The positive factors, such as the lower P/E ratio compared to the industry median and the improving ROCE, should be weighed against the potential risks.
Is This Stock Overvalued or Undervalued?
Based on the data provided, Canara Bank’s stock appears to be undervalued. The current market price (CMP) of the stock is ₹615, while the intrinsic value is estimated to be ₹1,703.14. This indicates a significant gap between the stock’s current trading price and its inherent value. Additionally, the stock’s P/E ratio of 7.59 is lower than the industry median of 11.42, suggesting that the stock is trading at a relatively cheaper valuation compared to its peers.
Should We Buy This Stock and Why?
Given the mixed financial indicators, a cautious approach is recommended for investing in Canara Bank. While the bank has shown strong profit growth of 37% CAGR over the last 5 years and has a high OPM of 56.3%, there are concerns regarding its high debt-to-equity ratio of 15.8 and the decrease in promoter holding by 6.40% over the last 3 years. The bank’s ROE of 10.4% over the last 3 years is also relatively low. However, the stock’s undervaluation, as indicated by the gap between its CMP and intrinsic value, and its lower P/E ratio compared to the industry median, may present a potential investment opportunity for those willing to take on the associated risks.
How Is the Industry of This Company Growing?
The public sector banking industry in India has been experiencing growth in recent years. Canara Bank’s peers have shown positive trends in their financial performance. For example, State Bank of India, the largest public sector bank, has reported a net profit of ₹11,598.46 Cr in the latest quarter, with a 23.33% increase in quarterly sales. Similarly, Bank of Baroda has shown a 20.97% increase in quarterly sales and a net profit of ₹4,814.58 Cr. The industry median for quarterly sales growth stands at 21.34%, indicating a positive trend. However, the industry also faces challenges, such as high non-performing assets (NPAs) and increasing competition from private sector banks.
In conclusion, while Canara Bank’s stock appears to be undervalued based on its CMP and intrinsic value, the company’s mixed financial indicators suggest a cautious approach for potential investors. The public sector banking industry is showing growth, but it also faces challenges that should be considered when making investment decisions. A thorough analysis of the bank’s ability to manage its debt, improve its ROE, and maintain a stable promoter holding is recommended before investing in Canara Bank.
Risk Factors Related to Canara Bank and the Banking Industry:
Business/Commercial Risks:
- Intense competition from private sector banks and non-banking financial companies (NBFCs) in terms of product offerings, technology adoption, and customer service.
- Regulatory changes, such as modifications in interest rates, reserve requirements, and lending guidelines, which can impact the bank’s profitability and operations.
- Economic slowdowns or recessions that may lead to reduced credit demand and increased defaults by borrowers.
Key Risks Associated:
- High non-performing assets (NPAs): Canara Bank’s Gross NPA stands at 4.76%, and Net NPA at 1.41%, which may impact the bank’s profitability and capital adequacy.
- Concentration risk: Over-exposure to certain sectors, geographies, or borrower segments may lead to increased risk during economic downturns.
- Cyber security threats: As banks increasingly adopt digital technologies, they become more vulnerable to cyber-attacks and data breaches.
Risks to Consider Before Investing:
- Fluctuations in the bank’s financial performance due to changes in interest rates, credit demand, and asset quality.
- Governance and management risks, such as ineffective risk management practices or lack of transparency in financial reporting.
- Macroeconomic risks, including inflation, currency fluctuations, and geopolitical events that may impact the banking sector as a whole.
Potential Risks of the Banking Industry:
- Disruption from financial technology (fintech) companies that offer innovative products and services, challenging traditional banking models.
- Stringent regulations and compliance requirements, which may increase operational costs and limit revenue growth opportunities.
- Systemic risks, such as liquidity crises or contagion effects from the failure of other banks or financial institutions.
Management Quality Assessment
Based on the information provided, there is no mention of any criminal cases against the promoters or management of Canara Bank. However, it is crucial to conduct thorough due diligence and gather more information from reliable sources before making a conclusive assessment of the management’s quality.
Recommendation: Considering the mixed financial indicators and the potential risks associated with Canara Bank and the banking industry, a cautious approach is recommended for potential investors. While the bank has shown strong profit growth and has a high OPM, the high debt-to-equity ratio, decreasing promoter holding, and the presence of non-performing assets raise concerns. Investors should carefully weigh the potential risks and rewards, and closely monitor the bank’s performance, risk management practices, and the overall banking sector’s developments before making an investment decision.
Long-Term Performance (6-10 years)
Canara Bank’s long-term performance outlook appears mixed, considering the available data. The bank has shown strong profit growth of 37% CAGR over the last 5 years and 98% over the last 3 years. However, the high debt-to-equity ratio of 15.8 and the presence of non-performing assets (Gross NPA at 4.76% and Net NPA at 1.41%) may impact the bank’s long-term profitability. The decreasing promoter holding over the last 3 years is also a concern. On the positive side, the bank’s Operating Profit Margin (OPM) stands at a healthy 56.3%, and its Capital Adequacy Ratio of 13.69% is above the regulatory requirement. If Canara Bank can effectively manage its asset quality, maintain a stable promoter holding, and capitalize on the growing demand for banking services in India, it may deliver reasonable long-term returns. However, investors should closely monitor the bank’s performance and the overall banking sector’s developments.
Short-Term Performance (2-5 months)
Canara Bank’s short-term performance is likely to be influenced by various factors, including the current economic environment, quarterly results, and market sentiment. The bank is expected to report good quarterly results, as mentioned in the pros section. Additionally, the bank’s stock has delivered a strong return of 36.5% over the last 3 months, indicating positive market sentiment. However, short-term performance can be volatile and may not necessarily reflect the bank’s long-term prospects. Investors should exercise caution and consider their risk appetite before making short-term investment decisions.
Medium-Term Performance (2-6 years)
Canara Bank’s medium-term performance may be influenced by its ability to manage its high debt levels, improve its asset quality, and maintain a stable promoter holding. The bank’s strong OPM and profit growth in recent years are positive factors. However, the low ROE of 10.4% over the last 3 years and the high debt-to-equity ratio may limit the bank’s medium-term growth potential. The bank’s ability to capitalize on the growing demand for banking services in India and effectively compete with its peers will also play a crucial role in its medium-term performance. Investors should monitor the bank’s financial performance, particularly its asset quality, and the overall banking sector’s trends over the next 2-6 years.
Recommendation: Given the mixed financial indicators and the potential risks associated with Canara Bank, a cautious approach is recommended for potential investors. The bank’s high debt-to-equity ratio, decreasing promoter holding, and the presence of non-performing assets raise concerns. However, the bank’s strong OPM, profit growth, and lower P/E ratio compared to the industry median may offer potential value for long-term investors. Before making an investment decision, investors should thoroughly assess their risk appetite, investment horizon, and closely monitor the bank’s performance and the overall banking sector’s developments. A diversified portfolio approach may help mitigate the risks associated with investing in a single stock.