Reliance Industries has been among the best performing Nifty stock over the last one year. For years, the stock was under owned and a rank under performer, while domestic institutions and Foreign Portfolio Investors chased banking stocks.
The tide has now turned. In fact, Reliance Industries has rallied 70 per cent in the last one year and bulk of the gains seen by the Sensex is on account of this stock. For years together the stock was completely ignored.
Banking stocks now looking attractive
In a similar manner, banking stocks are being shunned. Investors are dumping banking stocks like never before, following a poor set of quarterly numbers from Axis Bank.
State Bank of India at Rs 242 is not very far from its 52-week low of Rs 235, hit in November last year. The stock is down 20 per cent from its 52-week high of Rs 314. ICICI Bank has also seen a decent fall from levels of Rs 315 to Rs 257. Bank of Baroda is at a new 52-week low and PNB is not far away from it.
At the current market prices, banking stocks are the clear laggards, despite the Nifty rallying 18 per cent in the last one year.
Great embedded value
Some bigger banks like State Bank of India and ICICI Bank are great value picks, solely because they own stakes in life insurance business, card business, home finance, general insurance, broking business etc.
Not to forget their subsidiaries run huge asset management businesses (mutual funds). In fact, SBI holds s decent stake in NSDL and NSE, which together could fetch the bank a very decent amount.
This always makes players like SBI and ICICI Bank great stocks to buy.
Worries over NPAs may continue
The biggest worry for the banking sector are concerns over non performing assets. This may take some time to resolve and investors would have to be patient.
It is likely as economic recovery gathers steam we would see some reasonable decline in non performing assets. If this happens, then we could see some very swift recovery in banking stocks.
However, investors would do well to look at some of the large cap banking names like SBI, ICICI Bank and BOB.
Valuations look attractive
Valuations look attractive from a 2-year perspective. State Bank of India for example can post an EPS of Rs 25 by 2019. This means the stock is available at less than 10 times. However, we wish to state that it is always risky to predict profits of banks, but, one has to stick his head out and take a risk.
As mentioned earlier the huge investments the bank has in NSDL, NSE, life insurance, health insurance , asset management etc., make the stock attractive bet at the current levels.