UCO Bank: High Yield and low PBV idea

The Kolkata headquartered UCO bank is a mid sized public sector bank with strong branch network. The stock price of the bank used to languish at around Rs 20 till late 2006 and then went up to as high as Rs 150 in Nov 2010 an appreciation of almost 750% in 4 years. 

That was the time when most of the public sector banks got re-rated. But the recent correction in stock prices of majority of mid caps has made this stock again attractive from 1-2 years perspective. The stock has corrected around 28% in Feb 2013 alone. 

Performance wise, the bank has grown multi-fold since past 6 years in terms of advances, deposits, incomes and profits. The EPS of the company went up from Rs 5.16 in 2008 to 16.68 in 2012 while the dividend per share went up three fold from Rs 1.00 to Rs 3.00 during the same period.

The Book value of the bank went up from Rs 32.4 in 2008 to 94.7 in 2012. In FY 13 the bank is expected to register an EPS of Rs 14. Assuming dividend remains constant at Rs 3 the expected BV for FY-13 is approx 105.

If one hold the stock for one year, the stock price is likely to discount FY-14 book value by then which is expected to be more than 115. Valuing the stock at 0.8 times book, the expected target price for the stock in one year from now is Rs 92 an appreciation of almost 59% from the current market price of 58.

Considering the dividend yield of 5% plus and PBV of around 0.5, the downside in the stock seems to be limited while providing good upside potential. However it must be noted that if there is significant deterioration in asset quality of the bank in coming quarters then the book value might get eroded fast and the stock might not perform as expected.