Stock Shastra

The Bankex (the index tracking the performance of leading banking sector stocks) has given investors a whopping 31% return (CAGR) in the last decade. With such a past, most investors are looking forward to a promising decade ahead.

Last week in the first article on the Indian Banking Industry we tried to give a basic understanding of this sector highlighting the structure and business model. But, what needs to be seen is whether this sector has what it takes to be a winner in the future.

MoneyWorks4me.com brings you a simple analysis of the banking sector’s growth drivers and its future prospects.

The Banking sector in India remains an investment favourite for most of us. This is but natural, given its excellent performance in the past decade. But, when it comes to understanding the structure, we find it too complicated! Most of us even shy away from it.

MoneyWorks4me thus brings to you a simple analysis of the Indian Banking Industry in two parts.

This first article will help you learn the structure of the Banking Industry and what is its business model?

Sonia, a subscriber of MoneyWorks4me, was viewing the ‘Evaluate’ page of HDFC Bank at MoneyWorks4me.com. She realized that there was a difference in the financial parameters considered in the 10 YEAR X-RAY of a bank as compared to a manufacturing or IT company. Normally, 10 YEAR X-RAY checks the financial health on the basis of Net Sales, EPS, BVPS, ROIC and Debt to Net Profit ratio; in the case of banks, except EPS and BVPS, the other parameters were different. Reading terms like Net Interest Income, Total Income, Net profit to Total Fund ratio, Sonia got confused. She clicked on the PRICE CALCULATOR to check the MRP of the stock and again was surprised to find it a bit different than that for manufacturing or IT companies. Instead of using EPS, MRP was calculated on the basis of book value. “What is this? Why are Bank’s 10 YEAR X-RAY and MRP calculation method different from that of manufacturing companies?” she thought.

Here is what she found out…

In the modern era, power (energy) is one of the most critical elements for economic growth. Every household & corporate use it, according to their requirements. We cannot even think of driving the growth of the economy without it. Unfortunately, it is not available cheap because of depleted natural resources and environmental and security challenges.
So, what is the solution to this problem?

Just after completing my Masters in Economics in 2006 from Gokhale Institute of Politics and Economics, Pune, I joined a firm which was in equity research. My work profile was to evaluate companies on the basis of certain criteria and valuation methods. After evaluating companies we were supposed to prepare reports and give recommendations. I still remember the last statement of our reports: “Currently, Company X is trading at price P. At this price we recommend it as a Strong Buy/ Buy at x% of margin of safety.” We gave similar recommendations for ‘sell’ and ‘hold’ also.
When I joined the Company, I lacked enough knowledge on financial statements and basic terminologies. I didn’t know how the stock price behaves on different corporate announcements like bonus issue, public issue, preferential issue, ……, split, buy back, ……, merger, demerger, amalgamation, acquisition, ….., restructuring, change in accounting policy, …… and government policies. There [...]