Sleeping beauties

SMARTSHARE

The State Bank of India has been on a roll after the May correction, rising 84 per cent. Though the stock is now in a corrective mood, it made a 14-year high on December 4, when it touched 1,378.

Why is a 14-year high not good enough to be an all-time high? The answer lies in the utopian pricing of the stock during the heydays of Harshad Mehta, when it touched Rs 1,900 in March 1992.

The stock continues to trade at a premium of 15-20 per cent in the FII to FII segment. The fancy for Indian bank stocks has increased after the massive appetite shown by the FIIs for the Chinese banks, which are qualitatively poorer than Indian banks.

In October, the Industrial and Commercial Bank of China came out with the largest-ever IPO in the history of the world capital markets. ICBC raised $19.07 billion in the sale. The total demand for the IPO was a staggering $350 billion.

To put things in perspective, the largest IPO in India so far has been Reliance Petroleum, issue size just $1.2 billion. Cairn Energy's IPO would be slightly larger at $1.40 billion, but still no match for what we've seen from the Chinese companies.

There is tremendous demand for the banking sector stocks from the FIIs. Investors desirous of getting a pie of the banking sector could look at the subsidiaries of the State Bank, which have not seen much FII action for regulatory reasons.

A cursory look at the table below will make an automatic case for the under-dogs. Surprisingly, the ratio of non performing assets (NPAs) is much healthier for the subsidiaries. SBM is the best in this field, with NPAs of just 0.4 per cent.

Though banks are not judged on PE ratios, the subsidiaries quote at a massive discount to their parent. The price by book ratio, the most commonly used benchmark to judge banks, is the cheapest for the State Bank of Bikaner and Jaipur at 1.46 times (whereas SBI goes at 2.55 times). The capital adequacy ratio is equally good for all banks, with no major difference.

Why do we then find a disparity between the parent and the subsidiary?

There are many reasons.

One, which may merely be a conjecture, is that come 2009 all the subsidiaries may be merged with the parent. And the merger ratio may be in the favour of the parent.

But the real reason for the discount may be that individuals can't buy more than 200 shares per folio in these stocks. Then these are largely traded in the physical mode, though if you are lucky, you could get the delivery in the demat form.

It is expected that the government may amend the rules that will remove the limit on individual holding in these stocks. If this amendment happens the stocks could be lapped up by hungry FIIs that are willing to shell out 20 per cent premium over the prevailing stock price in SBI. They hold next to nothing in these stocks.

On March 23 2006, the Union Cabinet gave its nod for legislative changes that will enable the SBI to sell shares in its associate banks. The changes will also facilitate SBI to split the shares of its subsidiaries.

Long-term investors, not minding the rigmarole of physical shares transfer, could look at these subsidiaries at declines, specially State Bank of Mysore, which saw a 22 per cent rise YoY in net interest income last quarter.

Disclosure: Financial advisory Anagram may have recommended stock earlier at lower levels.