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Why banking stocks maybe better bet than pharma and IT?

Why banking stocks maybe better bet than pharma and IT?
IT and pharma stocks were one set of stocks that performed exceedingly well in 2013. Stocks like HCL Tech which began the year 2013 quoting at Rs 622, doubled and ended the year 2013 at around Rs 1263.

Similarly, Infosys which was quoting at Rs 2308 on Jan 1, 2013, ended 2013 at Rs 3485.

TCS and Wipro too have given stupendous returns in the last one year. The story in pharma remains the same. Sun Pharma, Lupin Labs and Dr Reddy's continue to remain FII favourities. Sun Pharma has rallied from levels of Rs 369 to around Rs 593 currently.

The price to earnings multiple for pharma stocks defy logic and so do the price to earnings multiples. If you want to chase expensive pharma stocks, you might want to do it at your own peril. For example, the price to book value of Sun Pharma is an astronomical 14 times. Ditto for many other pharma companies.

Now consider banking stocks. A decent PSU Banking stock like Canara Bank is trading at price to book value of 0.50 times and similar is the story of stocks like Syndicate Bank. A bank like Yes Bank is trading at a forward price to earnings multiples of under eight times. The dividend yield for banking stocks in some cases is as high as 5-8 per cent.

Of course, IT and Pharma sector are perhaps the only sectors that have been showing good growth, which is why analysts are chasing these stocks.

Having said that, it is not as if they are not fraught with risk. Nobody expected a US FDA ban on the facilities of Wockhardt and Ranbaxy. Almost all of the Indian pharma stocks export to the US and even one US FDA ban can pose immense problems to individual pharma companies. For software companies the threat of the US Immigration Bill continues to loom and the passage of the Bill could be a disaster for Indian software companies.


So, if banking stocks have been hammered largely on account of the high non performing assets, the risk is known and already discounted in the price. But, for IT and pharma sector the risks are not discounted. Also, it does not make sense to buy particularly into the horribly expensive pharma stocks. At least the IT stocks are relatively cheaper in comparison, while banking stock remain cheapest of the lot.

Also, the interest rate cycle will turn at some stage and the RBI will begun cutting interest rates. When that happens you are unlikely to get banking stocks at these levels.

Story first published: Friday, February 7, 2014, 8:45 [IST]
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