We had recommended Indian Bank at various levels for few positive metrics the bank had showcased. The loan book was not really affected due to lending to commodity business. Part of the stressed asset bucket is exposed to SEBs which will become operational once UDAY Scheme is rolled out successfully.
Though the bank is not very great to bank on for long term bet, we saw mispricing to large extent. Hence we had recommended to buy as it was hammered to very low multiples as the street painted it with same brush as other PSU banks.
Refer our note on Indian Bank dated: 14 Dec 2015
“At current price of ~Rs 115-120/share all the negative are factored in and the stock trades at 0.42x book value or 0.55x adjusted book value. We do not see downside to our buy price. However, the stock price has corrected 20-25% from our second buy call. We are expecting the gap between the price and valuation to fill up over relatively longer term as the company is small cap and not many participants like MFs and FIIs buy this stock. Since large cap public sector banks are also trading at discounted price, many institutions will first buy the larger counterparts. Once the confidence in PSBs is back, we can see very rapid rise in stock price of Indian Bank. We advise you to hold on and not panic if the stock price is very volatile. Better performance on NPA side and loan growth will act as a catalyst for the stock to reach its MRP.
We hope you have allocated ~4% of your portfolio into this stock. Please ensure you follow our allocation percentage while buying the stock.”
We did expect this to happen but we were not sure it would happen to early. We expected it to rise to our MRP over 2-3 years which would have been good 20%+ CAGR. But to our surprise it panned out early. We don’t like such multibagger to pan out so early for two reasons:
1) We may not have new stocks ideas at present to deploy our capital if we sell the stock. This cash may be earning just 6% post tax returns as opposed to atleast market return of 10-12% (We call it reinvestment risk in finance)
2) We have to pay 15% short term capital gain tax if we are compelled to sell within a year. [We call it “Govt sipping blood” (joking)]
However, we believe that we are a victim of that situation here. We recommend selling 50% of the stock at our MRP of Rs 210/share. You can continue with 50% of the holdings as we believe that the stock can move up along with earnings in subsequent quarters. We are taking a call based on how much upside we can expect in coming future. At the same time, we don’t want to remain overexposed to Indian Bank as we are already holding many commercial banking stocks.
(In this year due to very bullish sentiment we had to sell 2-3 stocks within one year because they went to overvalued levels very fast)
If it goes above 250/share in near term (2-3 months), we may recommend more selling. But we don’t get anchored to any specific price for selling. Every company’s valuation keeps on increasing every quarter. With every quarter MRP and selling price changes.
Similarly, with every quarter buying price and DP revises upwards (rare occasions, downwards) so do not worry that some of your favourites stocks are trading much above our Discounted Price. Our discounted price may catch up with the stock price eventually. I hope you have seen this happening in past. That is time when send our BUY signal.
Once again, we don’t expect our every stock to give us such phenomenal returns over short term. We are building a portfolio which should be held for the long term, which we define as at least 5-7 years. However, this does not mean every stock will perform in each year. Our performance should be judged on the basis of the overall portfolio over 2-3 years at least, not on the basis of short-term performance of individual stocks. Uninvested cash should be parked in money market/liquid funds/fixed deposits earning 5-6% post-tax returns.
Currently, the broader markets seem quite overvalued on basic metrics. Be extremely cautious. Don't rush to buy average or below average companies. Stay away from the euphoria. Keep some cash handy to buy stocks if markets correct. Don't be fully invested at these levels.