Modified the portfolio as below: SBI (40%), HDFC (22%), Zydus (20 %), Gruh (8%), Others (10%)
Hi Niraj
PSU’s are known for their inefficiency… SBI is a falling knife… And in 1 year or so SBI may take a further hit on its books due to merger of other state banks with itself…
Technically and fundamentally the stock will fall further…
Regards
mallikarjun
Hi Mallikarjun, Thanks for your reply. I understand the concerns but i am facing problem of managing number of companies in my protofolio. SBI is proxy for indian economy, but concerns of NPAs etc is well known and i suppose already discounted by the market. Also historically SBI trades between 10-15 PE being PSU leading back but currently trades at below 8. Also its asset size is close to 500 billion $ , so slight hint of improvements in economy or rate cut by RBI can get reflected in share price. I wanted to double my money in next 2-3 years and hope this may turn out right. I think biggest bank of india deserves valuation of close to 50 billion $.
SBI has hardly given any returns over the last 3 years whereas the good pvt bank stocks have doubled. These PSU banks are arm twisted by the govt to give loans to defunct bodies like State Electricity boards. With the economy going down and poor mgmt of govt companies we dont know what kind of surprise can pop up. Also these PSU’s are forced by the govt to reduce interest rates from time to time. I feel sarkari companies should not be given PE of more than 10.
Manish, thanks for your viewpoint which is correct to the extend. Investment return is just a game of probability. SBI is always inconsistently consistent stock in creating value for shareholders (for example till 2002-3 this stock used to trade at around 200, after 10 years it trades around 1800). so it definetly create wealth for its shareholders. Also govt need some strong banks to spread its agends and SBI is obvious candidate and govt dont want to make it weaker beyond a point. I will keep closely monitoring it. Even during 2009 period it didnot went below 900 and cosidering current book value etc it is not expected to go below 1200.
I was going through annual report of HDFC and found some interesting facts.
| Date | HDFC share price | % Appreciation till April, 2013 |
|---|---|---|
| April 1, 2003 | 66 | 1153 |
| April 1, 2004 | 129 | 542 |
| April 1, 2005 | 149 | 455 |
| April 1, 2006 | 268 | 209 |
| April 1, 2007 | 296 | 180 |
| April 1, 2008 | 482 | 71 |
| April 1, 2009 | 285 | 190 |
| April 1, 2010 | 547 | 51 |
| April 1, 2011 | 694 | 19 |
| April 1, 2012 | 670 | 23 |
| April 1, 2013 | 828 |
This means that only people who bought HDFC during or prior to 2004 has made good investment return of 4-5 times or more. Beyond that period its investment return is ordinary and comparable with fixed deposit and from last 3 years it is just in a range and have not really given any meaningful return to shareholders (unless u have timed your investment to perfection which is really difficult to do for most of us).
While same for SBI is as below:
| Date | SBI share price | % Appreciation till April, 2013 |
|---|---|---|
| March, 2003 | 260 | 807 |
| April 1, 2004 | 560 | 375 |
| March, 2005 | 657 | 319 |
| March, 2006 | 968 | 216 |
| March, 2007 | 993 | 211 |
| March, 2008 | 1599 | 131 |
| March, 2009 | 1067 | 196 |
| March, 2010 | 2000 | -10 |
| March, 2011 | 2600 | -25 |
| March, 2012 | 2200 | -10 |
| March, 2013 | 2100 |
|
Similar scenario is there for SBI also. If somebody has bought before 2004 then he has gained more than 4-5 times otherwise return is similar to fixed deposit or in recent years return is flat or negative. However historically it never traded below books (usually more than 1.3 times books) Considering current book value of around 1.2 it is close to fair value for SBI and chances of any down side for longer holding is almost negligible.
Past performance is not a guarantee of future performance.
BSNL was very strong company and if i remember correctly it was making good profit, but now it is running loss in thousands of crores. Reason is simple during these years the private telecom caught up with better services and infrastructure.
So SBI in 2013 is not in same position as in 2003, during these 10 years private banks have grown at almost 25-30 % and the gap is narrowing. Now we are in a depressed economic scenario.
Govt support only means that SBI will not go bankrupt but govt support does not mean company will give good returns ( AIR INDIA !!!)
I do agree that downside risk may be less .
Manish, Thanks for your response. MTNL, Air India cases are different and not comparable with SBI for the simple reason that telecom, airlines is capital intensive business and over long term baring few excellent companies has not given good share holders return across the world. Banking is relatively better business and india being govt heavy still have lots of govt related economy (more than 40 %) which is not likely to change in at least near future. Still most of govt sector depends upon SBI for banking. SBI is still leading bank in the country as far as traditional banking is concerned and its market share in deposits in last 5-6 years has actually increased and because of this cheap money it gives SBI competitive advantage over all other banks. Even in housing loans and many other category of loans it is still leading financial company in india. Also trust is most important factor in banking and still majority of people has more trust for doing banking with SBI than any other bank in the country. For comparison shake if we look at china (our political system and structural still is more similar to china) three govt owned bank is among biggest in the world with market cap of more than 100 billion $. Also govt through RBI controls printing of money and money being main raw material for banks it can always give upper hand to govt owned banks like SBI in indian setup. Finally investment return is just matter of probability and market perception and companies with negative market perception may also outperform in investment return.
From Screener
SBI HDFC bank AXIS ICICI YES(5 yr) Indus ind
Profit growth last 10 / 5 /3 yrs : 13-15 % 30% + abt 30% 27 % 30% + 30 %
Why stick with a low growth company.
The growth may or may not come from PE re-rating but cant expect growth to come from earnings.
Neeraj,
Agree with your point that retail customers have more faith in SBI than private banks. Thatis reflected in high CASA and retail loan portfolio of SBI. But, its Achilles heel is the NPA. Being a government organization, it has to lend to all sorts of dubious characters and companies controlled by Netas. This not only nullifies its retail portfolio advantages, but actually works against it. This is whereHDFC Bank has the upper hand. It has a reasonably good retail portfolio (both deposits and lending) and a much lesser NPA.
Manish, Your point is well taken about growth in the profit margin. In my case i am first looking to double my money with high degree of safety in next 2-3 years time frame, so investment also depends on individual investor scenarios. Banks across valued on increase in their book value size and over long terms no bank share price can increase at speed more than increase in their book value size. As per screener, SBI shareholder equity has increased about 5 times in last 10 years and similar is its share price increase. Share market is intelligent system and i suppose all banks are properly valued at this point of time (both private and public), however impact of new banking license is likely to be more on private banks as many of business houses vying for banking license so competitive intensity in the banking likely to increase. Still most of private sector banks are strong in corporate banking side and growing their books at past speed for them looks difficult in future. While for SBI to increase its share price even at reduced level of growth it is possible with slight cut in rates or improvements in economic condition.
Gyan thanks for your response. You are correct and i understand that HDFC and AXIS bank is currently among best banks in india overall and it is accordingly reflected in their current share price also. SBI NPAs level were always high (gross level varies from 3-7 % and at net level 1.3 to 3% ) even in the past. Investment i have done in SBI considering safety and potential of doubling in next 2-3 years time frame, as and when i find some better opportunities once my target is achieved i can reallocate to other suitable opportunities.
My current modified protofolio:
Zydus Wellness (20%)
Gruh Finance (20%)
Wockhardt (20 %)
Yes Bank (20%)
MCX (15%)
MISC (Ashok Leyland, Pidilite, Titan,Nestle, Heritage) : 5 %
I am not looking to modify my protofolio unless some sure shots opportunity is visible at reasonable price or any of the stocks in my protofolio gives me atleast 3-4 times return on investment irrespective of BSE/NSE levels.
If one wants to invest in a PSU Bank, why would one take SBI? If one takes into account the universe of PSB’s, then SBI is by far the most expensive. It has its strengths, but given the political scenario, the government is not going to allow any PSU bank to fail. Many smaller PSU banks are actually approaching almost crazy valuations. Many of them are available at PE’s of 2 to 3. They are also available at 0.25 to 0.35 of their book value.
The concern is clearly around NPA’s. And this is a very valid concern. But it appears that the market has punished them way too much.
Most PSU banks make a PAT margin around 1% on their assets. They typically have capital adequacy ratios of 10-12%. Which means that their book value is 10-12% of their total assets. Loan books are around 75% of the deposits. Even if one assumes that every year, for a couple of years, these banks will put aside 2% of their loan book as NPA, it will still mean that the book value will come down only by 15-20% (after deducting the 1% PAT margin). And once the economy recovers, then they will once again have profits equivalent to the past (1% of Assets, of which book value would be 10%). So they will earn the equivalent of 10% of book value every year. Which means that they would turnover their current share prices every 3 years.
This analysis does not require any presumption of growth at all, in fact it presumes that there will be some degrowth in earnings to the extent of 20%. But there is still adequate margin of safety here.
We are fast approaching with smaller PSU banks the prices which were prevalent during the 2008-2009 lows, and in fact their book values are typically 30-50% higher today than they were in 2008. Most of them rose between 300-500% from their 2008-2009 lows within a couple of years. Many of them have even returned 50-60% of their 2008-2009 low price in dividends in the last 5 years.
There is one important difference between 2008-2009. At that time, there was the fear of delinquency amongst borrowers, there was no real delinquency. At this time, there is a real NPA growth which must be factored in. However, there is also the cushion of higher book values relative to that time. Some have even been recapitalized by the government at a price which is 2-3 times of the the current market price.
Sometimes there is value in distress.
Regards
Samir
Samir you are correct and most of PSU banks are indeed look undervalued by historical standards. All good one including SBI, Canara Bank, Allahabad Bank, J&K Bank etc has delivered excess return than market (more than 15-20 % over sensex long term for more than 10 years time frame). However being PSUs they are not focused towards shareholders return and mostly management don’t care about lending till the point they receive their cut. Also their employees cost is way too high and in most cases more than their profitability it clearly shows that they are more inclined towards service their employees thatn to shareholders. So with reasonable certainty it is very difficult to project when they will able to recover or realize their true potential. I myself have done huge allocation to SBI but i divested after thinking that in almost similar valuation if yes bank is available why not go for it where probability of good growth is higher.
Dear Niraj
I believe that at least some of things that you state above are not borne out by the numbers. I just checked the numbers for Yes Bank and Syndicate Bank. I chose Syndicate Bank, because last year, it had an EPS very similar to Yes Bank, and roughly similar size of profit.
When you compare the two numbers, Interest expended over total income percentages are similar, in the low 60%. Operating expenses over total income are also within a couple of percentage points within each other. So also, ratio of operating profits to total income. In all cases, the absolute numbers of syndicate bank are approximately 1.5 times those of yes bank.
The huge difference between the two banks is in provisions, with Syndicate banks provisioning almost 10 times that of Yes Bank in terms of percentage of operating income.
As a result, despite having assets 1.5 times higher than Yes Bank, Syndicate bank’s net profit after tax is only 1.1-1.2 times that of Yes Bank.
However, the interesting aspect is the ROCE for both banks is around 20%. This is because syndicate bank’s capital adequacy ratio is much smaller than Yes Bank. Both banks have similar EPS in the range of 33-35 Rs.
Given that both banks have roughly similar ROCE, and syndicate bank is slightly more profitable than Yes, one might expect that both banks should be priced roughly similar. Even growth in the last year has been similar between the two.
Wrong.
Yes Bank has a market cap which is more than double Syndicate Bank. Yes Bank is priced at more than book, while Syndicate Bank is priced at 0.39 times book. The PE ratio of Syndicate Bank is 2.01. The PE ratio of Yes Bank is around 7. With the same EPS, the CMP of Syndicate is 67, while that of Yes is 260.
The question is of Margin of Safety. At this CMP, Syndicate offers a better valuation and a higher margin of safety than Yes Bank. As market values reflect the fundamentals more closely, the likelihood of Syndicate Bank giving better returns than Yes Bank over the next 2-3 years is higher.
This is not a statement of long term (>5 years) values. Nor is it a statement of PSU vs. Private banks. It is simply an assertion of valuation differences at the current market price, and what represents a better value and higher margin of safety.
Disc: Own both Yes and Syndicate, but in the last week have substantially increased the ratio towards syndicate.
Samir, You are correct and i am not an expert on analyzing balance sheets and numbers as much as you are. I just understand numbers (balance sheets, P&L etc) but number, statistics and bikni has one common things they reveal important things but hide vital things. Also i have observed in last few years (i have only about 4-5 years experience in market) that in most cases market always somehow turns out right and market is clearly telling that Banks, Financials, FMCGs, auto, capital goods atleast have tough time ahead in 2-3 years time frame. Pharma, IT, Steel/metals, Power etc is likely to outperform in near terms. I always now prefer to invest based on my gut feeling and i have observed most of the time it turns out correct though with some time lag.
Niraj,
This kind of gut feeling investing does not interest me, somehow. In the past, I have always lost money in trying to time markets and trying to follow the trend in the market. If the market is always right, what makes it clamor for Yes Bank at 450 2 months ago, and now no one has interest at 250? The same market which loves metal stocks in august hated them in june. All pharma and FMCG stocks trade at multiples of 30. Does anyone really expect them to grow at 30% a year for the next 10 years? Institutional Investors and the animal called the FII have their own logic and self preservation tendencies. One can’t buy stocks based on what everyone else is buying or selling. That involves a judgement call on their good judgement which I am not able or willing to make. It also involves a speed of trading which is simply not possible for a person who has other activities. A small investor then plays the game with one hand tied behind the back.
I am trying to develop an investing style which involves finding deep value in stocks. So then you find shares which have a high absolute value, even with low growth and performance expectations attached to them. Then at least capital preservation is likely, with high likelihood that markets will eventually turn their attention to their good fundamentals, and then there will be good capital gain.
These stocks must have an inherent value, regardless of any macroeconomic calls. I really don’t have the ability to say that the dollar will be at X level after y months, or that growth will recover, or that great agricultural growth will trigger demands for tractors. In such a situation, one takes a macroeconomic call (which may or may not be right), and then extrapolates it down to the effects on a sector and further down to a company, and one’s judgement may be wrong at each of the places. And macroeconomics can be quite unpredictable.
Normally such stocks, with a deep inherent value in relation to the CMP are difficult to find. In these sorts of markets, easier picks are available. I don’t intend to change my portfolio dramatically every few months. Indeed, during such markets, I may continue to see erosion in my portfolio. But if I have the courage of conviction, I can use that as an opportunity to buy further.
Samir, if sector leader in this case HDFC, HDFC Bank, SBI etc start loosing heavely as if there is no tomorrow it surely a sign that sector is going through lots of difficulties. As per some research stock price movement happen 40 % due to macro economic conditions (otherwise why we think share market in india has moved 5 times from 2003-08 period), 30-40 % due to industry specific conditions (that is why we saw in last 2-3 years most pharma, FMCGs has given good return irrespective of products they sell or management quality or most telecom in last 3-4 years has not performed well ), 20-25 % due to company specific issues. I am also of the opinion that we need to pay reasonable valuation (less than 15-20 PE) irrespective of current/future projection about company to make good stock return otherwise we can expect mediocre return only. My previous comments not to say that market is always right but it is mostly right in its assessment but it lacks any long term memory and just project its price based on recent history. (Take example of NMDC it was quoting at more than 25 PE about 2 years back and everybody was convinced about its potential and wanted to buy now currently it is about 5 PE but mostly people not interested to touch it).