Monday, December 5, 2011


Before I begin this post, I would like to revisit one of my earlier posts and at the cost of sounding a bit immodest, things have indeed panned out like I expected

From this post, I would just like to highlight the following bit.

Feb 21, 2011

The only reason I am uncomfortable with this cheap valuation argument is the fact that the current scenario is looking a bit like early 2008, when we had the big inflation scare led by Crude’s surge towards $140/bbl. It’s worth noticing that from Jan 2008 to April 2008, the SBI stock fell from 2463 to 1605. From FY09 book value perspective, the P/BV fell from2.3x to 1.5x. It then had a brief rally towards 1795 and it looked like bottom was in place, and then we had that big fall to 1078, taking its P/BV to 1x. Under current circumstances, a 1x P/BV would be if stock hits 1850. I am not saying this will happen, just saying it can happen.

Ok now what? SBI indeed breached 1850, in fact even lower than that, which just goes on to prove that you should not believe in this myth that any 20-30% correction in a blue chip is a great buying opportunity. The big question now is whether one could buy SBI now?

To be fair, the stock of SBI has had a decent rally over the last week and the trading move well may have been over as I write this. While it’s tough to be bearish on India’s largest bank after the stock has halved from its peak, but it’s equally tougher to be bullish on it either in current environment.

The biggest concern for me on SBI is the way it is being handled. Two weeks back, there were reports that LIC would be told to buy equity stake in Kingfisher and of course if that has to take place, SBI has to go in for a loan deal for Kingfisher which may not make business sense. So while SBI is country’s largest bank and has a great branch network with highest penetration, the biggest worry is will it be allowed to operate as an independent financial institution?

If the answer to the above query is No, then there are troubles which lie ahead. We have seen SBI maintaining that Air India is still a standard asset for them and recently all lenders have agreed to rejig the debt plan of the troubled Airline. What if Kingfisher’s debt restructuring is next?

Now SBI has exposure of Rs 1200 cr to Air India and Rs 1400 cr to Kingfisher. For a bank with a balance sheet of over Rs 12 lakh crores, these are peanuts, but in a larger scheme of things, some of the bad assets are sufficient to eat out an entire quarter of profit as we saw in Q1 of the current fiscal and a bit of that in Q2 as well.

So what next for SBI stock? Well, with the limited knowledge of banking sector, I can say with fair degree of conviction that its highly unlikely that SBI goes to 2500 in near future. For that too happen, it has to deliver 2-3 quarters of stable earnings and prove to the market that the worst of asset quality is behind. On the other hand, once this global cheer settles and markets are back to reality, there is a good chance that market would again focus on the asset quality and headwinds facing SBI and you cannot rule out the stock testing say 1500 mark. So for me, the risk on downside is slightly more than upside.

The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options given to him by his previous employers as part of his compensation