Sectors and Stocks that are "Out of fashion" but on my buy-list

Hi Balaji,

A growth stock is like… say… Yes Bank. Investors are betting on Yes Bank growing at a certain pace and rubbing shoulders with Axis’s and even SBI’s revenues. That may or may not happen. So, Yes Bank is a growth stock.

Value Stock is like Axis Bank. It is accumulating profits each year and also growing revenues but by a small percentage. That additional growth may not happen for a few years, but that won’t change my view of the stock.

One way to spot Growth stocks is to spot very high PE ratios (over 20x).

Prabheesh, hello.

Point well noted. HDFC offers more stability. But that may be overrated.

The reason why HDFC has a lower NPA than SBI is because HDFC is not aggressive on giving corporate/business loans. It has taken a safer route of home loans. Isn’t that the main reason why HDFC has a better PE than SBI?

What could go wrong is, with realty doing poorly HDFC’sstrong reliance on home loans could bind trouble. Its income could take a major hit for a few quarters causing share prices to fall/crash. Just like it happened for another stalwart… ACC!

Point is… be it SBI or HDFC… the stock must be bought at a correction, at a discount… and definitely not in the 30% reach of All time Highs. It leaves little “Margin of Safety”.

I admit things could go wrong for SBI, but I have purchased it a high discount; at a low PE hence I find it safe. Had i bought it at 3000+ i’d be shakin in my boots! I don’t care if its SBI, HDFC or Ambanis… all of India’s corporate culture is way behind the international benchmark. The reason why Berkshire won’t invest. In essence, anything could happen to any company… MoS is a must.

Just My views. Please share yours.


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Hello Balaji,

I too want to buy HDFC… badly. :slight_smile:

But I am not buying cuz it is expensive. PE 0f 20 is just too overpriced. If the price falls in the range of 400-500 then I will give HDFC Bank a special place in my life… :slight_smile:

Hi Amit,

The biggest reason why HDFC Bank is not falling as much as other banks is because of its loan portfolio, which more or less ensures lowest NPA’s amongst its peers, especially in the current context. Remember the case of loans to KFA, Deccan Chronicles amongst others.

The other reason is the high interest rate regime. I think HDFC Bank can more easily transfer it to its clients, home loan borrowers, as compared to say a Corporate / business loan borrower.

And inspite of its size and conservative nature, it has still managed to give consistent 25% + growth for the past so many years.

And talking about the price of 400-500, it will be agolden opportunity anddream come true for many. So even if it falls that much, it won’t stay there for long because there will be many hungry buyers waiting to lap it up.


Hi Vijay,

I agree with you on all counts.

HDFC Bank has an excellent business model, which is why the share price is demaning a PE ratio thrice as much as the largest bank in India: SBI.

Yet, I am hoping that there is a chink in the chain. No business is fool-proof. Even the strongest brand in India, Colgate, has fallen around 40% in 2006.

It is not necessary for the fundamentals of a company to deteriorate for the share price to collapse. If the stock has too much investor expectations grilled in, but the results are lukewarm, then good many people would dump the stock and hop on to another train. Not all investors are long-term thinking. It happened to HuL recently, which BTW is an excellent stock at 450 levels.

Also, the economy or the banking industry could be in general mode of correction, where 30% fall would be customary and across the board.

I believe the time is ripe. The correction is already underway. HDFC recently made a low of 566.

I think you are confusing HDFC with HDFC Bank here. HDFC Bank relies on retail loans and working capital loans to corporates. HDFC gives home loans/loans to real estate players. HDFC Bank does sell home loan products of its parent & earns a commission but it isn’t a large part of its revenues. HDFC Bank does give selective project loans but I guess those type of loans don not easily pass their strict risk management criteria.

I prefer banks that are conservative rather than aggressive. When the cycle turns bad like now then all the bad loans appear.

Prabheesh, hello.



Hi Grey.

Yes, I had them confused for a moment there. I guess I assumed that if the parent HDFC is facing performance issues, then it will affect the sentiments and performance of HDFC Bank as well.

And we do not want much… only 35 to 40% correction to 400 to 450 levels… bas itna saa khwab hai. :slight_smile: One sharp bout of FII selling will do the job.

It is plain cruel to ones finance to buy stocks near all time high, no matter how good they are. Case in point, HDFC Bank. A gem of a company crashed 9% today! That makes it a total of 160 points down from the top.

My buy price is Rs.400.

Presenting the Logic to purchase HDFC at Rs.400:

Shares O/s 237.94
Year NP EPS Price PE
2004 509.5 21.41 76 35.49
2005 665.56 27.97 109 38.97
2006 870.78 36.60 155 42.35
2007 1141.5 47.97 190 39.61
2008 1590.2 66.83 264 39.50
2009 2244.9 94.35 194 20.56
2010 2948.7 123.93 387 31.23
2011 3926.4 165.02 469 28.42
2012 5167.1 217.16 520 23.95
2013 6726.3 282.69 624 22.07
2014E 5200 218.54 440 20.13

You will notice that for the year 2014 I have taken conservative estimates for apparent reasons. Net profit is around 2012's and if we consider a bearish PE of around 20, then the Share Price comes to 440; which also happens to be 2011's Low.
I think my estimates are not unrealistic.

If HDFC Bank has slower earnings than 2013 then Sensex will probably be back to 9000 by then. I find the probability of both these events quite low at this point. HDFC Bank if you look at the past has grown at 30% since last 12 + yrs. Even back when the world stopped for a bit in October 2008 it grew 30% for that qtr


The quality of HDFC Bank as a stock will remain intact even if it takes a hit due to slowing economy.

The reasons why earning will take a hit and growth may not happen:

  1. It is believed that all banks will face restructuring due to NPAs. No matter how good.

  2. Corporate Borrowings have significantly reduced and so have sales in realty.

  3. Banks now have lesser liquidity due to RBI restrictions.

I believe these three points are indisputable.

Moreover, in 2008 NP was 1600 CR… now its 6700 Cr. This makes HDFC Bank a different beast entirely. The challenges are different and so is the economic scenario.

Back in 2008 the economy was fine, only the share prices fell due to Housing Meltdown in the US. I have seen it in almost all the company balance sheets I am tracking. The profits were stable and even growing.

Now the story is different. Almost all companies are showing a drop in sales. Just finished checking Bhel… .its sales fell by 67% last quarter which is unprecedented.

Therefore, I feel it is fairly possible for HDFC to fall back to 2012 earnings. And PE will definitely reduce.

These factors make me sure that HDFC will hit 400 levels within a year’s time. Cuz the trend has already started. It may go lower, but I will be complacent at 400. :slight_smile:

Hello Amit,

Would like to point out one major thing here. Financials are values more on PB ratio and less on PE ratio. Since NPA’s have to be taken into consideration, book value is only thing that can be adjusted for NPA’s.

Lets take example of Union bank after Q1. It’s book value is 17,846 Cr and at current market cap, it’s trading at peanuts valuations of 0.34 PB. Take 3882 Cr of net NPA into account and valuation becomes 0.44 PB. Also take under provisioning of NPA’s and approximate valuation comes to 0.5 which is ofcourse very very cheap.

Point to note is when bull market returns, Union banks PB will be rerated from 0.5 to 1+ while HDFC bank will go from 3 to 4.5. This plus growth in HDFC Bank ensures peace of mind for investors. In 2-3 years you might make more returns in union bank but it will always remain cheap stock. And sleeping well for 2-3 years when your stock crashes by 60% is not possible for 99% of investors.

Key with quality stocks is ability to invest large sums of portfolio. Ask yourself 1 question. If your net worth is 10 Cr, how much are you willing to invest in HDFC Bank and Union bank.

Most people will invest max 20%/2 Cr in HDFC bank and still be in peace. Can you do this with Union Bank? Can you see your 2 Cr reduced to 70 Lakhs even temporarily? Answer is big NO. And so most people will invest max 3-5% of folio in banks like Union. And it’s overall gains on portfolio that matter more than a multibagger on 1% position.

Hi Nikhil,

I agree, in totality, with your “sleep well” argument.

PE ratio shows me the level of investor interest and seek to invest when it is on the lower side. Relative PE ratio of past 10 years gives a reasonable estimate.

I do not value my stocks in the conventional manner. I have seen way too many people use DCF, Dividend model, PEG, PB, PE ratios etc and still get mediocre results. Hence, I choose to follow the Monthly Charts, a reference from DCF and lots of common sense.

This unique self-reliance has shown success. Majority of investors called Bhel a strong purchase at 300 Levels. I said 2008 Lows. Same with NMDC, EiL, Union Bank and a few others. It is likely that I may miss entry into a few stocks. But, whatever I get into will be at a good price.

Hi Amit, Nikhil,

as you guys have a good handle on banks thought i shud help extend it to one more bank,

came across this article, the argument sounded pretty logical ( to me, but i have no competency in bank)

Your views could make the learning wider


Hi Amit, Nikhil,

as you guys have a good handle on banks thought i shud help extend it to one more bank,

came across this article, the argument sounded pretty logical ( to me, but i have no competency in bank)

Your views could make the learning wider


Hi Hardtoget,

Almost all private sector banks are good at current price if you are willing to take pain and hold for 2+ years. ICICI, Axis and Yes Bk are trading at cheap PB. You can also look at IndusInd, Kotak and HDFc Bk.

It depends on your risk taking ability, holding period and comfort zone.

HDFC/Kotak - More comfort and downside protection. Will give good returns but not as much as others.

IndusInd - Bit more volatile and risky. But good on growth and better returns.

ICICI/Axis - Cheap valuations. As much returns as IndusInd but little bit lower on growth in 2-3 years.

Yes Bk - Most risky, most volatile. Can give most returns in 3 years. The problem is ability to hold on through big drops and volatility.


I never got past looking at Axis and HDFC in the private (large)banking sector. And had a mild dislike for ICICI, every since its share price plummeted a few years ago due to a scam.

After reading the link you sent, I looked at the major ratios I normally refer to and understand. Here is my prognosis.

Red Flag #1)

ICICI has a strange way of Accounting. It posts a NEGATIVE Gross Profit (OpM) every year, but Net profit is positive.

This is because its Net Profit comes from large “Other Income” and not Core Banking Business.

Does it mean ICICI cannot generate profit from its Banking Business? Which opens a whole new can of worms: Does it have high cost of borrowing?.. Why? Does it not have enough credibility? How long can this go on? Will ICICI shut its banking operations when the going gets tough?

It is very likely that I do not understand something about the Others Income category or the unique way the Statements of ICICI Bank are designed. And I have little motivation to venture in its direction aslong as I have other super solid investment options in private Banking space.

Red Flag #2)

ICICI is losing market share since 2007. It seems it has reached a peak. When an entity loses its foothold, it is likely to do crazy things.

Net Interest Income &Non Interest Income/total fundis at2.70 &1.63 standalone basis which means healthy core business. Also, on market share concern, ever since M/s Kochhar taking over as CEO in 2008, ICICI bank has been in consolidation mode n cleaning up hugee mess of reckless growth pre-2007 times.

How ICICI has turned around has been amazing and i have been greatadmirerof M/S Kochhar for this. Even now you can see very high GNPA at near 3% which is result of reckless growth but still they manage so well to keep Net NPA under 1% mostly.

PS: Im still novice n learning, correct me if my understanding is wrong :slight_smile:

Hi Jos,

I have not come across a single good company that posts negative operating income. None!That is the biggest red flag for me. M/s Kocchar’s job is going to get much tougher in the coming years. And in such tumultuous times I do not want any big red flags.

I will share with you another point of concern; A big Red Flag #2:

Why is the promoter holding NIL. Yes… 0.00%.

I strongly suggest that if you believe in the growth story of the banking sector then look at another entity in the private sector, which is not expensive, like Axis. It has much better ratios too.