Dumping HDFC Bank for PSU bank stocks? History may repeat, warns Saurabh Mukherjea
NEW DELHI: If you have been trying to play the momentum trade in PSU bank stocks by dumping the underperformingshares, here's a cautionary advice from veteran fund manager Saurabh Mukherjea - the underlying fundamentals may soon play catch-up.While shares ofBank are down about 12% in the last one year, those of PSU banks likeare up 50%,34% and25% during the period. "Over the last year or so, banking stocks which are considered to be attractive basis low value of metrics like P/BV and expected to show near-term improvement in their fundamental metrics have seen a lot of investor interest leading to an increase in the aforementioned multiples alongside commensurate stock returns," Mukherjea said in a note to investors.The central tenet of long-term stock price compounding for lenders, he said, happens in line with the Book Value Per Share (BVPS) compounding. BVPS compounding in turn is dependent on the bank’s RoE as well as the multiples at which equity capital raises are done over a cycle.Describing the recent divergence of stock price movements away from the tenet as a temporary phenomenon, he said banks which are able to raise equity capital at higher P/BV multiples, deliver greater BVPS compounding for their shareholders.Giving historical precedents, the Rs 13,000-crore fund manager who runs Marcellus PMS, said HDFC Bank’s stock price returns were close to zero from FY00-03 (these were the four years at the beginning of the noughties credit cycle) even as its BVPS compounded at 37% CAGR. This dissonance was corrected over the following five years, however, as the stock price compounded at 42% CAGR over FY03-08. "We expect to see a similar pattern playing out currently as the stock price performance of HDFC Bank has remained subdued since FY19 end," Mukherjea said, adding that the lender's fundamentals have continued to grow at a healthy pace with a 5-year EPS CAGR of 20% but stock price CAGR of 10%.
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