Its been one full year since I started tracking PSU Bank stocks using a 10 stock portfolio. The catalyst for putting this portfolio in place was a feeling that PSU Banking space seemed relatively cheap (in November 2013) when compared to historical averages. I further hypothesized (or rather speculated) that over a period of next 5 years, this space would give better returns than broader markets.
And this speculative thought led to this portfolio and its quarterly tracking.
Portfolio Composition & Weightages
The portfolio which started off as an equally weighted one with all stocks sharing 10% of initial capital has moved a bit in last one year. It has now tilted more towards large caps due to better performance of larger banks than smaller ones over the last one year.
Overall Portfolio Returns
So how has the portfolio fared in first year of its 5 year journey? To be honest, the results have been better than what I expected a year back. But that is not only because of low starting valuations or my stock picking skills. It is actually because of sudden rebirth of the Indian Bull Market. The portfolio has returned more than 42% (excluding dividends) and 45% (including dividends) in last one year. This is much higher than market returns of 35.8% in the same period.
Individual Stock Performances
But not all stocks have performed equally well. If we were to look closely at next graph, we will find that larger banks have performed much better than smaller ones. Four of the five large banks have given returns higher than market returns of 35.8%, whereas only one among the smaller ones has beaten market in last one year.
Quarterly Portfolio Performance
On a quarterly basis, the portfolio has been quite volatile. Though it wins the annual race comfortably, it should be noted that in 3 of the last 4 quarters, broader indices have beaten this portfolio!! It was only because of a jaw dropping 2nd quarter performance, that annual returns of the portfolio could beat the overall markets.
This also shows that if someone was brave enough to go out and buy these banking stocks in February 2014, when they had come crashing down, the current returns would have been much higher the 45%.
It’s been rightly said that you need to show some Courage in Crisis (and take Cash-backed decisions) to make money in stock markets. But its tough to time the markets for average investors like. Period.
You can read more about the quarterly portfolio performance using links below:
Apart from market beating capital appreciation, these stocks have also given dividends which are in line with expectations from PSU stocks. The ten stocks have cumulatively earned dividends of Rs 3173 on original investment of Rs 1 Lac. This gives a dividend yield of 3.17% to this portfolio – Decent by historical standards.
I know a lot of investors do not like stocks paying dividends as it means that company does not know what to do with its cash. But I personally prefer dividend paying companies. But this does not mean that I own all these shares in my personal or family portfolio. 🙂
So what should be the expectation for next 4 years? If one expects this portfolio to give similar returns (45%) for next four years too, then that would be wrong and over-optimistic. Under normal circumstances & assuming that common sense will prevail, maintaining a 45% rate for a portfolio of 10 stocks for five years is not possible – Assuming that we are not Warren Buffett. 🙂
But out there in markets, there are people who are ready to throw targets like 40,000 and 1,00,000 for Sensex over next few years at your face. They believe that we are getting ready for mother of all bull runs and its possible to earn 45% kind of return year after year.
My First Advice is to ignore them.
My Second Advice is to ignore my advice too. 🙂
Its your money and you have earned it the hard way. Don’t just depend on other people’s advice to take decisions about your money.
It’s time for 3rd quarterly update of PSU Bank Portfolio. For benefit of those who do not know the whole story behind this tracking portfolio, I would briefly share the purpose of this portfolio:
In November 2013, like many others, I also felt that PSU Banks (as a group) were grossly undervalued and would give better returns than broader index in next 5 years. This portfolio tracks my gut feeling on a quarterly basis and was started with 10 stocks having equal weights.
To know more details and thought process behind this portfolio, please read the first post in this series here. After this there have been 2 quarterly updates which can be found at below links:
In last 3 months, markets have been kind to PSU Banks (except to Syndicate Bank, which was in news for a bribery case linked to its Chairman). The portfolio has given a return of 10.9%, which is similar to that of broader index (11.3%).
Now if you compare this performance with that of previous quarter, i.e. 48% (against market’s 18% – details), then this one can be shrugged off as a pathetic one. But frankly speaking, I don’t think 10.9% in one quarter is a bad performance at all. Even if I am not beating the market, a performance which is better than after tax returns of safer, risk-free assets is acceptable to me.
In last 9 months, this portfolio has given returns of 40.5% (excluding dividends) and 43.7% (including dividends), which is better than Nifty’s 29% return in same period.
And surprisingly, it has been the larger banks which have performed better than than their smaller counterparts. And we always thought that smaller stocks moved more and faster.
I still remember my last portfolio update post in February 2014. The post was titled PSU Banks are Losing Hell Lot of Money, and rightly so. After just three months of starting this portfolio, it was down -12% compared to Nifty’s -1.5% returns. It seemed that markets were hell bent on proving me wrong. 🙂
But thanks to Modi-Wave sweeping the country, last month has pushed up PSU banking stocks like a eagerly awaited IPO’s price in first week of its listing. And because of which, the overall 6 months returns of this portfolio has reached a stupendous 27%!! And if you include dividends, it touches almost 29%. And this is against Nifty’s return of 15.8%. And here we are talking about big, country-wide banks and not small cap stocks.
Note – Returns based on prices upto 14th-May-2014
But before you put your money in PSU banks, please remember that on the business front, almost nothing has changed for these banks. Its only because of the so-called-hope, that these stocks have charged ahead. But having said that, prices these shares were trading sometime back were ridiculously low compared to historical valuations. And because expectation from this portfolio is to givebetter returns than index in next 5 years, this current out-performance should be taken as an exception and not as a rule.
But there are two simple yet important observations which I would like to highlight here:
Sometime in January 2014, concerns about asset quality were getting a lot of media attention & hence stocks of these banks reached almost absurd levels of undervaluation. But when the markets turned euphoric due to elections, it was the group of larger banks (SBI, BOB, PNB, etc) that bounced higher than smaller ones (Syndicate, Allahabad, Andhra, etc). This came as a surprise as I expected smaller ones to be more volatile and prone to movement due to market noises (even though asset quality of these smaller ones pose a bigger question than that of larger ones.)
Another interesting fact is that this Portfolio of government owned PSU banks is quite a volatile one. And as you can see in table below, quarter-on-quarter portfolio returns have fluctuated from -14% to +47% over the last 6 months. And that is a very high level of volatility. So, those who have difficulty sleeping at night due to stock markets, please avoid this group of stocks 🙂
In last post, I had specifically mentioned (read speculated) that it was possible that these stocks would become volatile in coming quarter. Never thought volatility would be so high. 🙂
A screenshot from previous post dated 15-Feb-2014
If you are interested in knowing further details of these 10 banks’ share-price performance & dividends in last 6 months, please click on image below to enlarge:
Detailed Portfolio Tracker – Last 6 Months – Click to enlarge
And with this being the first quarterly update, we still have 19 more quarter to look forward to. As we all know, asset quality issues and competition from more efficient private banks still remain. But the journey has just started. A snapshot of the portfolio is given below:
In case you want to get more details, please click on the image below to enlarge:
Please note that I am separately tracking dividends as these government entities are quite liberal in doling out dividends to their shareholders (read: government), and hence we cannot neglect the contribution of dividends in this portfolio.
One of Stable Investor’s loyal readers Subhodeep made an interesting point in the earlier post:
“Some PSU Banks may yield progressively more than their own FDs over next 5-10 years. In other words, for someone looking for supplementing his monthly income, it might be better to buy stocks, which might end up yielding eventually 15% (on initial cost) or so in next 10 years, instead of buying a 5 or 10 year monthly income certificate (8% or 9% taxable return) in the same PSU Bank.”
And this yield on cost makes quite a lot of sense. I personally know people who now earn yields in excess of 600% every year (on-cost) on their investments made almost two decades back!!
But lets go back to banking sector for now. 🙂 March 2014 is almost here and pretty soon, its possible that there might be some important announcement about new banking licenses. So, it is once again possible that few of the PSU banking names may see a volatile quarter of price movements.
But already down close to 15%, these stocks look quite attractive for long term. What do you say? Do you think these stocks would make more money than index in next five years? Or we are not going to see these stocks make new life time highs in next 5 to 10 years?
Yesterday’s Economic Times carried an interesting article on why it makes sense to have a holding company for all PSUs.
Personally, I am a proponent of dividend investing and think that it makes sense to go for good dividend paying stocks to build core of one’s portfolio. (Read more about Core-Satellite approach to build your portfolio here.)
So, when I read this article’s heading, I got even more interested as most of these PSEs are known to be good dividend paying companies. That’s a different matter altogether that its because of political pressures and lack of vision that these companies pay dividends.
I think the article makes a few valid points, if not all. These companies over years have accumulated huge reserves of cash, which are going unutilized or are being given back to shareholders (read govt). And by huge, I mean real huge. These PSUs have combined reserves that run into to lakhs of crores!!!
Now if there is just one board (of directors) and not different ministries that gives mandate to these companies, that too without any political intervention, just imagine how efficient and effective these PSUs might become. And this would eventually reflect in market-capitalization of these PSUs. A company like IOCL having 11 refineries (each costing almost 30,000 Crore) is available for less than 50,000 Crore! That is the level of undervaluation which exists in some of these PSUs.
And having a central holding company would ensure that these companies are run without direct interference by administrative ministries in their day-to-day affairs. But it is also possible that this approach would lead to situations where cash reserves of profitable companies are used to fund expansion plans of ‘dead’ loss making businesses. But these are operational issues which can be handled with detailed planning, where certain criterias would have to be met before cash reserve of one company would be used to fund other.
But on the face of it, this idea does seem to be an interesting one. Isn’t it?
Almost a year back, I had done a case study on Indian Oil Corporation Ltd. The study was an exercise to find a correlation (if any) between company’s share price and its book value per share. And surprisingly, this graphshowed something interesting. To cut the long story short, it clearly showed that share prices of IOCL (almost) never stayed below its book value for too long.
So with prices hovering near 200 and adjusted book value of 250+, it seems that it might be a good time to look at this stock again.
The first thing which I decided to do was to update the graph between IOCL’s share price and book value per share. And as expected, this is what I got…
IOCL || Worth A Second Look
During the last 15 years, share prices of IOCL have dropped below its book value only thrice. Once during the dot com bust of 2000-01, in crash of 2008-09, and now. And presently the Price/Book Value stands at a pathetic 0.75.
But this does not mean that prices cannot fall any lower. They can go down further. But also, the chances of Book Value going down are very remote. Even if we assume a nominal 5-8% annual increase in book value, the price at which shares are available seems to be quite cheap.
So why is it that IOCL is available at such low P/BVs? We can discuss and debate about various possibilities. But I feel that it makes more sense to find indicators which support the view that shares are indeed available at cheap prices. Or rather try to find reasons which might suggest that our hypothesis is not correct. Let’s see…
I have experience of working in oil industry and I feel that Oil Marketing Companies are currently trading at huge discounts to their intrinsic value. I agree that government is the sole decision maker in these PSU companies and we know how the government operates. And this fact in itself would shave off a decent chunk of intrinsic value from the shares of this company. 🙂
Crippled By Politics & Government
But you cannot deny the presence of massive refineries and oil pipelines. And just to give you all an idea of cost of building refineries, just head to this link to see costs of various projects being taken up by these Oil Marketing Companies. Just the cost of putting up a new refinery is in excess of Rs 30,000 crores!!
But on stock exchanges, the entire company which owns 10 such refineries is available for just Rs 50,000 crores. And I haven’t even taken the cost of laying more than 11,000 kms of oil pipelines. Nor have I taken into account the country wide network of retail outlets and a decent overseas presence in Mauritius and Sri Lanka!
And if one closely monitors the energy space, one would understand that it is now almost inevitable that subsidization of fuel would be handled more prudently by the government in years to come. And going forward, with reduction in subsidies by government & various caps on LPG cylinder’s domestic consumption, there is a decent possibility that OMCs like IOCL would benefit in the long run. But this would not happen overnight. And patiencewould be a key here. Agreed that with elections around, there might be temporary vote seeking measures like increasing the no. of subsidized cylinders, etc by the ruling parties. But things are changing on the energy administration space. And in due course of time, these subsidies would play much smaller role when people evaluate the oil companies.
(Caution: The paragraph which you just read is full of speculation).
Another indicator of stock’s undervaluation is the ongoing discussion on disinvestment. The Petroleum Ministry has summarily rejected Department of Disinvestment’s idea of a stake sale. The reason being quoted is huge undervaluation of shares. But govt seems to have decided for stake sale and may eventually go ahead with sale of its stake to other energy companies like ONGC, OIL, etc. In past too, government has resorted to the so-called cross-holding route to shore up its revenues.Or the government might try the ETF basket route (source). But all-in-all, this indicates that prices are quite low, and even if they were to go down a little further, which is of course possible considering the overhang due to disinvestment and other election-related-factors, it might be a good idea to accumulate this stock for long term. If not for appreciation, then for a decent dividend yield going forward.
Note – This post should not be considered as an advice to buy shares of company discussed above.
After doing case studies on ONGCand IOC, we chose another company from our Dead Monk’s Portfolio for case-based analysis. But before we get down to details, just have a look at the 2 graphs given below. One shows increase in book value per share during the last 10 years. The second shows increase in dividend per share during the last 10 years.
Book Value Per Share (2000-2013)
Dividends paid per share (2002-2012)
The company in discussion is Balmer Lawrie & Co. It has continuously increased its book value from Rs 101 (2003) to Rs 423 (2013) at a CAGR (what is CAGR?) of 15.4%
It has also increased its dividend per share from Rs 1.80 (2002) to Rs 28 (2012) at a compound annual growth rate of an astonishing 32%. Even if you consider the last 5 years, growth rate has been a market beating 16%.
In India, dividend stocks do not get the respect they deserve. A similar stock in US markets would have definitely found a place in USA’s coveted list of great dividend stocks: S&P Dividend Aristocrats.
But this is India. 🙂 So lets move ahead with our case study…
What does this strangely named Indian company, Balmer Lawrie & Co. do?? We haven’t even heard about it…
Almost 8 out of 10 people involved in stock markets have not heard of this name. People don’t even know about the existence of this company. And even if they do, they don’t understand the rationale behind the name, let alone the heterogeneity among its business verticals. So let us first introduce the company to you.
Balmer Lawrie & Company was started by 2 Scotsmen, Stephan Balmer & Alexander Lawrie in 1867. Yes, the company is 146 years old!! As of today, it is a Public Sector enterprise under the control of Ministry of Petroleum & Natural Gas. So here we have a debt-free PSU with turnover of Rs 2100+ crore, which we never knew of. 🙂
The company operates its businesses under 5 heads – Tours &Travels, Industrial packaging, Logistics, Lubricants & Others (engineering products, tea packaging, leather chemicals, etc). You can read more about the company here.
How has Balmer Lawrie increased its book value and how this data can be used to enter this stock?
Stock Price & Book Value Movement (2003-2013)
The red blocks in above graph are book value per share over the last 10 years. As already discussed in earlier graphs too, it has been on a constant uptrend since last 10 years. On the same axis, we plotted the share prices. And it is not very difficult to see that book value has acted as a strong support for the stock price (a similar pattern was found in our analysis for Indian Oil). The stock price has rarely fallen below its book value. And when it has, it has almost always moved up into higher zones.
Can we use Price/Book Value as a parameter to check stock valuations and as a criteria to enter this stock?
Correlation between P/BV & 5 Year Returns
The graph clearly shows that lower the Price/Book Value per share, higher have been the 5 year returns. So you have the answer to the question. 🙂
Assuming Balmer Lawrie maintains its generous dividend payout policy, how can we use Dividend Yield as criteria to enter this stock?
If we see historical averages, the company has maintained an average dividend yield of 3.2%. The yields hit a historic high of mouth-watering 8.2% when markets crashed in March 2009. But it quickly moved back to more ‘normal’ levels of 3% to 4%. (see graph below)
To check whether there exists some correlation between dividend yields and 5 year returns, we plotted a graph between these 2 parameters. And the result is summarized by one statement and graph below –
Correlation between Dividend Yields & 5 Year Returns
…that above approach uses just 2 parameters, P/BV & Dividend Yield to decide about when to buy the stock. You as a reader should remember that there is a considerable difference between real life and case study. One should never invest based on just one or two parameters. This case should not be taken as an investment recommendation. Do your own research before investing your hard-earned money.