State of State Bank of India @ Rs 225 ~ Shareholders Perspective

State of State Bank of India @ Rs 225 ~ Shareholders Perspective

Sensex is arguably reckoned to be the Barometer of our Economy & State Bank of India & Larsen & Toubro have been arguably reckoned to be the best India Proxy Plays in our growing Economy

Received a Forward from an Overseas NRI Friend enquiring if it was true that :

  • Rs 5 lakhs if invested in 2000 in a Fixed Deposit of State Bank of India would have been ¬†currently worth Rs 26 lakhs while
  • Rs 5 lakhs if invested in 2000 in Shares of State Bank of India would be currently worth a whopping Rs 5.74 crs !

ūüėą Someone’s quite excitedly promoting ¬†Investment in State Bank of India ¬†& advocating Equity over Fixed Deposits over a long period….cannot blame the ‘someone’ for the excitement but deliberate exaggeration to prove the point !?

Anyway,gives me another opportunity to showcase the Magic & Power of Compounding with which I normally commence my Training Sessions

So FD ya Share?

Let’s take Investment in the Fixed Deposit first :

Here’s the Interest Rate Scenario in India form 2000 to date 2016

india-interest-rate

The average Interest Rate in the 16 years this Millennium is under 7% with Top High of 14.5% hitting in August 2000 & a low of 4.25% being recorded in April 2009

Assuming even that in July 2000 if one locked in the high rate of @ 14% in a 10 year deposit ,Rs 5 lakhs would have grown at a 14% CAGR to Rs 18.54 lakhs in 2010 & then at 8% CAGR grown to Rs 29.42 lakhs in the eight years till date July 2016….a straight CAGR would be 11.75% for 2000-2016 period….so the FD part of the Forward could be accepted when it states Rs ¬†5 lakhs invested in a FD of SBI in 2000 would have grown to Rs 26 lakhs in 2016….this gives a CAGR of 11%

Now let’s Look at Equity Returns from State Bank of India :

The Forward excitedly proclaims that Rs 5 lakhs invested in the Shares of State Bank of India in 2000 would have grown to Rs 5.74 crs in 2016…..This would mean 11380% absolute returns and a CAGR of near 35%….Not Incredibly Unbelievable but certainly requires Verification

State Bank of India was at Rs 225 in July 2000 & is also Rs 225 today in July 13,2016,sixteen years hence….However the Face Value was Rs 10 in 2000 ¬†& now the Face Value is Rs 1

Thus Rs 5 lakhs invested in 2000 would have grown to Rs 50 lakhs now & not Rs 5.74 crs !….Original Investment of Rs 5 lakhs in 2000 would have been 2222 shares @ Rs 225(FV Rs 10) ¬†which on 10:1 Split to FV Rs 1 in November 2014 would have been 22222 shares which at current price of Rs 225 would be worth Rs 50 lakhs.The Absolute Returns would have been 900% while CAGR would be @ 15.5% in this 2000 to 2016 period read more

HOV Services buoyant @ Rs 163 ~ Economic Times quotes me

HOV Services buoyant @ Rs 163 ~ Economic Times quotes me in today’s edition¬†on the clearly apparent undervaluation of the stake sale in Source HOV at just US $ 95 m to promoter entity…should be worth at least US $ 250 m

Hope better sense of fair play will prevail and the stake sale is passed at  a much higher consideration

Even at US $ 95 m, the gross consideration is Rs 580 crs while Market Cap of HOV is just @ Rs 200 crs…The Equity is Rs 12.50 crs (FV Rs 10) =>Rs 464/share deal value proposed…hopefully should be reconsidered to much higher….Company say the Board will decide what to do with the Monies but clearly they should be considering returning a large part to shareholders as special dividend…1000% Dividend ¬†that’s Rs 100/share maybe ?

The Buoyancy in HOV should sustain and in fact the share price can gallop up even more smartly if better sense prevails all around and minority shareholders are protected with a better deal value than the US $ 95 m proposed to the promoters entity itself

Had blogged in detail on this recently and that’s how Economic Times probably saw merit in this line of thinking and covered it with my quote

HOV Services @ Rs 153~Up 62% In 4 Days And Worth More Despite Undervaluation Of Investment Sale To Promoters

…similar point well made by Economic Times too except it’s Bank Tec that is merging into Source HOV and not the other way round…though ratios are correctly stated where the smaller Bank Tec is valued marginally higher than the much bigger SourceHOV…not looking fair too though the latter carries deb

…Morgan Stanley is mentioned too but their important role has not been shared by the Company in full disclosure especially if they were involved in the Valuation & ¬†deal negotiations and ¬†how did they arrive to give a financial committment for a new line of Credit of US $ 1.1 Billion to SourceHOV

…also is Citigroup,the largest and majority shareholder ¬†of 68%+ in SourceHOV selling too as the article mentions !? if so have they accepted this valuation of PKF Sridhar & Santhanam,the Chartered Accountants of BankTec or on which valuation are they going !?

…because the Indian Listed Company’s notifications to the BSE & NSE on September 30,2014 only states that the deal will be contracted and consummated at the same valuation provided to the majority shareholder !…that’s Citigroup

…the notification also states that SourceHOV will use the new US $ 1.1 Billion refinancing facility…. committed by Morgan Stanley….. for three purposes as below read more

“Should City Union Bank be retained for 3 Months ex Rights ?” asks Rahul ~ Just became ex rights yesterday and is @ Rs 50 now

Hi Rahul ~ Your Question is quite interesting and I’m sure over 80000 shareholders of City Union Bank would like to know too !

On November 12,2012 I had blogged on a surging L & T Finance and it’s stake in CUB

Yo! L & T Finance Holdings Zooms 12.7 % To Close At Rs 72.40 Today ~ It Holds 4.68% Of City Union Bank (CUB) Which Is Cum Rights Rs 59.75

“Should you retain CUB ex rights for 3 months?” ¬†is what you ask

The Answer depends on the Shareholder’s Risk Profile and whether the shareholder is comfortable with a Long Term Outlook on CUB

Of Course your Question is specific on the time Period ~ 3 Months

There are  Two Approaches to Consider here and assess their weightage in your decision making to immediately sell or hold CUB ex rights

  1. Immediate to two to three  months ex rights Impact on  Share Price  and  Traded Volumes because of the Rights Issue  ~ There will be some price pressure ex rights
  2. Assets and Earnings Valuation of  CUB and Interesting Shareholding Developments  going into 2013 ~ I will give more weightage to this  

Rational Thinking  and Maintaining Same Scrip Weightage Exposure in the Portfolio would guide you to adopt a strategy of  replacing existing original CUB holdings with  Cheaper Rights at Rs 20 ~ However the Rights Ratio is only  1: 4 and the Rights Pricing is attractive at Rs 20 and therefore it will not be possible to replace entire original holding as you may not get more shares than entitled even if you do apply for them ~ so you could adopt the strategy of selling 25% of your original holding now ex rights @ Rs 50 knowing you will be getting the same quantity in the Rights at Rs 20 ~ this will serve two objectives ~ Reduce your Holding Cost while maintaining  CUB weightage in your Portfolio 

The Risk you take here is that the Share Price of CUB actually will move up in 2013 from ex rights Rs 50 levels ~ This brings us to the Assets and Earnings Valuation  Assessment of CUB ~ Ex Right the Book Value drops to Rs 30 +and the FY 13 Projected EPS to Rs 5+ giving us relatives of P/BV of 1.6 and P/E of 10 ~Despite the Pressures on Margins and rising NPAs with such a huge FII Shareholding of over 21% of the Equity as well as L & T Finance  being the largest shareholder holding just under 5% in CUB,my sense is that 2013 will be a very interesting year

I would take a longer term view and give more weightage to continuing and sustainable valuations and the ¬†interesting ¬†shareholding developments that may take place in 2013 and beyond in CUB and would not sell CUB ex rights ~ Of course this would mean I’m increasing my shareholding in CUB through subscribing for the Rights and therefore also increasing the CUB weightage in my Portfolio

I suspect what most will do is to sell 1/4 th original holding right away ex rights at Rs 50 and replace these with the Rights Shares at Rs 20 ~ I also noticed heavy buying cum Rights at Rs 60 by those who are playing the Rights Game with ¬†a ¬†Financing and Fixed Return and Stag Mindset ! ¬†Their holding cost ¬†will be Rs 52 /share => 4* 60 + 1*20 => 260/5=> Rs 52 ~ Therefore they may sell ¬†when CUB moves to just Rs 55 and beyond to capture their ¬†5 % absolute Interest Returns in the next ¬†two to three months ~ Therefore in the Short Term there will be some Pressure on the CUB ¬†Share Price ~ but will it drop towards Rs 40 ! ? I think one should take the risk it will not given the Valuations and Shareholding Situations that I’ve specified above read more