Motilal Oswal has come out with its Bulls & Bears handbook on valuations in India. Every month, it covers valuations of Indian market vis-à-vis global markets and also current valuation of companies in various sectors. It also covers sectors that are currently valued at a premium/discount to their historical long-period average.
Looking at the handbook, there are many government owned banking stocks that are trading at a discount to long-term averages. Here are three such government banking stocks, which could be worth buying.
PSU banks stocks that are available at discount
|Current p/e||10-year average p/e||Discount|
|Bank of Baroda||8.3||12.9||-35.00%|
|State Bank of India||9.7||13.8||-29|
From the above table, it can be seen that the stock of Indian Bank is the cheapest in terms of valuations and hence is a solid pick. The shares of Indian Bank are available at a price to earnings multiple of just 3.5 times and are available at a discount of 66% to long-term averages as per the Motilal Oswal Bulls & Bears, handbook on valuations in India.
Why you should buy select PSU bank stocks?
According to the handbook, PSU Banks are trading at a P/B of 1.1 times, near their historical average of 1 times. "Some public sector banks reported lower slippage trends v/s select Private Banks. The corporate cycle is also clearly turning, and we expect public sector banks to benefit from it," says the Motilal Oswal Bulls & Bears, handbook on valuations in India
The brokerage has also noted that the earnings outlook is improving, led by a reduction in credit cost estimates, as most public sector banks have strengthened their provision coverage over the last couple of years.
"Select public sector banks have also undergone a capital raise to prepare themselves for growth opportunities. Also, the current capital position of most public sector banks has improved," the Motilal Oswal Bulls & Bears, handbook has said.
SBI and Indian Bank are stocks to buy from the PSU banking space
Within public sector banks, State Bank of India appears well-positioned to report a strong up tick in earnings, led by a normalization in credit costs and improvement in the business momentum in both the Retail and Corporate segment.
"Among PSUs, we estimate State Bank of India to reach a decade-high RoE of 15% by FY23E. SBI remains the top share to pick," the brokerage has said.
Emkay Global and Motilal Oswal have upside of almost 31% to 34% on the stock on SBI. Last month the brokerage firm Emkay Global raised the target price on Indian Bank to a whopping Rs 225 from the current market price of Rs 135.
The 2 stocks of Indian Bank and SBI would remain the top stocks to buy, because of what analysts are betting and the discount to long term averages on these stocks.
"Overall, most public sector banks are trading at reasonable valuations, with an improving earnings outlook," Motilal Oswal has said in its bulls and bears handbook.
Investing in stocks poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article. Investors should take precaution because the markets are near record highs.