India Stocks: Bank Nifty offering good value

Wednesday, November 19, 2008

As discussed before, I have started to look at components of the Indian market to create a portfolio of good companies that have been trampled and are now offering value.  Today I start on the Financials which have been kicked in the teeth and continue to bleed.  The Bank Nifty has twelve component banks as follows:

ICICI , HDFC Bank, SBI, Axis Bank, PNB, Kotak Bank, BoI, BOB, Union Bank, IDBI, Canara Bank, and OBC.
Market capitalization (as at November 18, 2008) of the Bank Nifty is Rs 235,831 crore. The earnings after tax for the last six months totaled Rs 13,700 crore.

To arrive at a Bank Nifty fair value I have used the following assumptions and projected forward the income stream on which we have a claim for an indefinite period of time:
  • Over and above current provisioning levels, write-off 2 full years of earnings
  • Grow earnings at 15% for the next 10 years and 8% thereafter
  • Discount this cash stream at 20% to arrive at a Net present Value
This analysis gives a fair value for Bank Nifty of Rs 331,400 crore suggesting the current market is offered at a 40% discount.
To provide a measure:  the Bank Nifty was trading at a market cap of Rs 735K cr in January 2008.  
I continue to feel the the market is forming a bottom...and the detailed analysis is slowly suggesting the same.  If you have questions on the above analysis then post them below in comments.  Good Huntiing.

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2 Post Comments:

Narayanan said...

Is it possible to think of investing in bank shares at this juncture as this is the field that has suffered most? I think that the markets were taken to baseless tops, by interested people and the top is searching for the base now as the propelling force is lost.

Lee said...

Narayanan: The heights for all sectors were dizzying and unsustainable...I think Realty has been punished even more than Banks in 2008.

However, you have to imagine rates in India will be lower by at least 300bps in the next few months...when the rally starts it will start with Banks as their earning visibility is best...this is because of governance and disclosure.

So, yes I think it is time to take overall exposure to Banking..although specific banks will perform differently...I have preferred the overall Bank Nifty route for now.

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