Wednesday, May 13, 2009

Investment Opportunities in PSU Banking Stocks

There is a query from Vikas in the Comments section regarding investments in PSU Banking stocks as related with its Dividend yielding capability acting as a 'likely' Fixed income opportunity.

Hi Viral,

My question to you is ... will it be better to invest in PSU banks. Banks like IOB & Andhra Bank has declared a dividend of 45% i.e., Rs 4.5/- per share.

I've noticed that most of the PSU banks gives regular dividends on YOY basis ( so your equity investment in these banks , more or less act as FD in the long run- as you get regular returns from them).

Please let me know your views on the same?

Vikas

My Reply:

To this, i would like to say that, there certainly is a degree of truth in his way of thinking. But, the point is not absolutely taken as there are many other stocks, both from public and private sectors, with past history of good dividend yielding track record and robust performance.

Most of the PSU stocks from sectors other than Banking & Financials are also well known for good dividend yields. Being Public sector companies, these PSU stocks are impliedly obliged to fill-up the coffers of the central government (and of course, other shareholders too) by the way of regular dividend outflows on account of their majority stake in the Companies.

Coming to the Private counterparts of PSU compaies... many leading private sector companies with good cash flows are also not behind in doling out good dividends on a consistent basis. In fact, many companies also have implied policy guidelines of forking out as much as 30-50% of their quarterly profits as dividends for their shareholders.

However, the above does not mean that i am against investment in PSU Banking stocks. In fact, PSU Banks is a very good sector to invest your money with a tangible bit of safety quotient. PSU banks have a certain stricter regulatory guidance than high flying private sector banks in terms of lending operations & risk taking.

Though, during times of optimism, PSU banks also have to deal with a bit of hump with issues like expansion, raising capital, etc. due to the same regulatory hurdles. In the current scenario of severe slowdown, PSU banks have somewhat caught up with market share of private sector banks to some extent. In stead of looking at PSU banks as purely Dividend yielding stocks, i would like to recommend you to stick with only Top 4 banks from Public sector.

My 1st Preference would be banking major State Bank of India (SBI). If you prefer Mid-caps among PSU banks there are some very good banks like PNB, BOB and BOI to choose from.

Now, from Valuations point of view SBI is a bit expensive when seen from the lows of Rs.900 it has established a couple of months back. Though, the stock would provide good investment opportunity for Accumulation below Rs.1150/- to start with & more on dips.

Among BOB, PNB and BOI...

BOB looks the most expensive but this largely backed by its robust performance in quarterly results. PNB is a relatively cheaper stock in terms of valuations and is biggest PSU bank after SBI. However, even this stock has almost doubled since its lows of Rs.300/- BOI certainly looks cheapest of all the major PSU banking stocks. However, this lag is on account of relatively disappointing results in comparison to other PSU banks. Anyways, the fundamentals of BOI are too strong to lag so much behind in terms of valuations.

From investment perspective, investors need to hold out for now before plunging in for buying fundamentally strong PSU Banking stocks. At the most, investors can hand pick few units of BOI which is relatively reasonably valued in comparison to other Banking stocks. However, investors can consider accumulating these stocks on large dips during a big pull back for the current rally.

In my List of Favourite stocks in the previous blog posts, i had clearly given a Buy call for SBI and BOB from investment perspective. But, remember... personally, i would prefer to have a nice blend of PSU banks & private banks in my portfolio, preferably in favour of private banks.

BANKING & FINANCIAL SECTOR: (15% of over-all Portfolio)

10% - Banking (6% PVT Banks + 4% PSU Banks)
05% - Non Banking Financials (NBFC)

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.

6 comments:

Shabu's said...

Nice viral....keep it up.

Vikas said...

Thanks Viral... for presenting your thoughts on investing in PSU banks.

I also had a thought that these banks also provide us a good buy out or M&A opporunity from other banks in coming years.

Anyway, I loved your view point.

Regards
vikas

Mohit said...

Thanks Viral for updates,

What are your views on Alok Industries stock is trading near 52 week low , good results for last quarter please share your views on stock and wht would be good price to enter the stock or if its not even worth to hold.

Viral Rajnikant Dholakia said...

Dear Mohit,

I was just thinking since last couple of days about investment in Alok Industries on decline. Just as you have posted this query over here.

The stock is, in deed, a good one to invest from the lagging Textile sector. It is one of the few stocks which has shown robust business model & performance as compared to other textile players on a consistent basis.

POSITIVES FOR ALOK INDUSTRIES:

This vertically integrated textile company has presence in 3 broad categories viz., Textile, Retail (H&A Stores) & Realty. The company has expanded its textile business in last few year both domestically & internationally. The company is also involved in distribution of textile products to the US supermarket chains. In near-term, the company is likely to benefit from depreciated rupee value at Rs.50.

MAJOR CONCERNS:

The major area of concern for Alok Industries is it's high Debt-Equity Ratio. Though, with the recent Right issue by the company, the high debt ratio is likely to moderate to some extent.

However, most of the company's interest liabilities for its long-term debt is subsidized under textile promotion scheme.

The stock is a very Attractively priced & a Good Buy for Long term investors in the range of Rs.12-14.

Shalu said...

Dear Viral, when will the sector see revival? How long will we have to hold the stock to see real movement in it?Thanks

Viral Rajnikant Dholakia said...

Dear Shalu,

Dear Shalu,

It is difficult to predict the turn-around of entire Textile sector as a whole.

But, definitely, irrespective of such speculation and prediction, one can cherry pick good stocks from the sector on individual basis. Alok Industries is one such case in point.