Tuesday, December 25, 2012
fooled by randomness: Stocks really sell at funny valuations
fooled by randomness: Stocks really sell at funny valuations: As Warren Buffet once said that the thing with stocks is that many a times they do trade at funny valuations and buying such stocks made hi...
fooled by randomness: Indian ecommerce...really sustainable????
fooled by randomness: Indian ecommerce...really sustainable????: While browsing for online books today, suddenly came across infibeam.com... I used to think that flipkart was cheap, who else can offer boo...
fooled by randomness: Why spicejet can be a multibagger
fooled by randomness: Why spicejet can be a multibagger: 1) India needs to fly. Travelling by air is not yet a common practice among many Indian household. Air travel in India is still in its infa...
fooled by randomness: PSU Banks seems like a no brainer
fooled by randomness: PSU Banks seems like a no brainer: Indian public sector banks looks like potential multibaggers. There is too much pessimism in the markets about the asset quality (potential...
PSU Banks seems like a no brainer
Indian public sector banks looks like potential multibaggers. There is too much pessimism in the markets about the asset quality (potential bad loans) of PSU banks which have made their valuation dirt cheap when compared to private banks (many PSU banks like andhra, allahabad trading at PE multiple of 3 while private sector banks like icici, yes bank are trading at PE of 15+). It is definitely true that public sector banks have much worse asset quality when compared to private sector banks; but in a country like Indian there is a zero probability of default for PSU banks as the government is standing behind them. It is ridiculous to think Indian Government which doesn't let a loss making company like air India to go bankrupt will ever let a PSU bank default. Common people right from CEOs to Chaprasi have their money parked in bank and yes mostly in public sector banks as even common man understands that PSUs won't default. The government will probably topple if people loose money due to PSU banks going bankrupt. The PSU banks understands this mentality of indian public and it is evident from the fact that PSU banks deliberately provide a lower rate of interest on deposits and still have a much larger market share of deposits than private banks.
The only possible concern for PSU bank is not defaulting but whether customers can shift their accounts to private banks because of service quality. But this looks like a remote possibility given that PSU banks service quality be it net banking, mobile banking, cash transfer everything is at par with any private bank. (This is something that happened with MTNL (Maharashtra telecom). While it is still free of default probability, its profit went down as people choose not to use its outdated services. Government though can ensure no default for a public entity it can't dictate public /customer about choosing what products /service they want. And so MTNL's profits dwindled and so did the stock price).
Once we understand that PSU banks are not going to default and neither will they go the MTNL way, we should think about triggers for PSU banks stocks to rally. The biggest trigger is of course RBI cutting interest rate. Banks make most profit when interest rates are down as it encourages people/cooperates to take loan and whenever number of loans go up so does the profitability of banks. The other effect of interest rates going down is that PSU banks which have to mandatorily hold huge amount of government bonds will start reporting huge profits on their bond portfolio (in layman terms bond prices go up when interest rates come down).
If even this is not enough to convince any investor about the potential of PSU bank stocks look at the dividend yield. Several PSU banks like Andhra bank, Allahabad bank have dividend yield close to 5.5% and dividend income in India is tax free. If someone puts money in fixes deposits today he is expected to earn 9% at most. If it is taxed at 30%; the final interest available becomes 6.3% (=9*(1-.3)). So, in PSU banks we have risk/ default free interest giving interest/dividend income close to any fixed income product available in the market and on top of that huge scope (probably 2-3 times capital stock appreciation) return in 1-2 years.
The only possible concern for PSU bank is not defaulting but whether customers can shift their accounts to private banks because of service quality. But this looks like a remote possibility given that PSU banks service quality be it net banking, mobile banking, cash transfer everything is at par with any private bank. (This is something that happened with MTNL (Maharashtra telecom). While it is still free of default probability, its profit went down as people choose not to use its outdated services. Government though can ensure no default for a public entity it can't dictate public /customer about choosing what products /service they want. And so MTNL's profits dwindled and so did the stock price).
Once we understand that PSU banks are not going to default and neither will they go the MTNL way, we should think about triggers for PSU banks stocks to rally. The biggest trigger is of course RBI cutting interest rate. Banks make most profit when interest rates are down as it encourages people/cooperates to take loan and whenever number of loans go up so does the profitability of banks. The other effect of interest rates going down is that PSU banks which have to mandatorily hold huge amount of government bonds will start reporting huge profits on their bond portfolio (in layman terms bond prices go up when interest rates come down).
If even this is not enough to convince any investor about the potential of PSU bank stocks look at the dividend yield. Several PSU banks like Andhra bank, Allahabad bank have dividend yield close to 5.5% and dividend income in India is tax free. If someone puts money in fixes deposits today he is expected to earn 9% at most. If it is taxed at 30%; the final interest available becomes 6.3% (=9*(1-.3)). So, in PSU banks we have risk/ default free interest giving interest/dividend income close to any fixed income product available in the market and on top of that huge scope (probably 2-3 times capital stock appreciation) return in 1-2 years.
Subscribe to:
Posts (Atom)