Dena Bank is one such stock that I quite like in the PSU banking space. Dena Bank has been growing at almost 20% for the last 2 years, but then that is not the reason I like this scrip, but clearly due to valuations it is trading at currently. The company has been doing good and yet is so undervalued. Dena Bank can see a good upside from current levels if they maintain good growth in FY12 as well.

Dena Bank posted net interest income of 1,763 cr as against 1100, up 60% YoY and net profits stood at 612 cr as against 511 cr, up 20% YoY. Net interest margins grew from 2.1 to 2.8 in FY11 which is good. Dena Bank has posted an EPS of 18.3 for the year ended FY11. Brokerages are estimating a 20% kind of growth to continue in FY12, but I believe the rate hikes recently is going to cause some drop in the bank’s margins and thus the 20% growth looks unlikely. I’ll estimate my FY12 earnings growth to be roughly around 15%.  Thus the estimated EPS for FY12 earnings comes to 21. The stock is trading at a P/E multiple of less than 5 for FY11 earnings and it trades at a P/E multiple of 4.3 for one year forward FY12 earnings. You can see the valuations and judge for yourself. But for a re rating, Dena Bank has to post a decent set of number in FY12, which could be a little challenging due to all the rate tightening going on.

However Dena Bank has enjoyed 8 kind of P/E multiples in the past when it had run upto almost 150 before falling down but then that was a bull run. Nevertheless I think Dena Bank can easily re rate itself to 6 kind of P/E if markets remain stable. Thus I derive a target price of 126 for Dena Bank.

Buy Dena Bank(cmp:90) with a target price of 126

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