India’s Fossil Fuel Subsidies have led to a massive growth of the petrol and diesel mafia in the country.India gives subsidies on diesel,kerosene and cooking gas through its state owned petro/gas companies like BPCL,IOCL,HPCL etc.These subsidies have been given for a long time and have led to the growth of a parallel black economy in these products.They not only lead to capital misallocation but also to the massive illegal profits for a few.It is a well known fact that all petroleum pump owners adulterate petroleum ( which power most of the cars) with subsdized diesel and kerosene.This massive racket earns millions of dollars (if not billions) for a network of company officials,pump owners,government bureaucrats and politicians.The mafia is so strong and powerful that it thinks nothing of burning alive a senior police official.The racketeers are so rich and well connected that despite common knowledge nothing gets done about it.
Note the issue size of the IPO is quite small at around $100 million which means the retail portion is only $30 million.Coal India IPO with a $3 billion issue and $1 billion retail portion got subscribed by almost 2-2.5x.This mean that Punjab and Sind Bank can get subscribed by almost 60x since MOIL IPO got 55-60 times overall subscription with almost 31x retail portion even when the issue size was almost triple that of Punjab and Sind Bank.Note though MOIL IPO in my opinion was more undervalued than PNSB,still I think oversubscription in case of this PSU Bank would be higher than that and could easily cross the 31x retail that MOIL IPO got
Punjab and Sind Bank is a National PSU (Public Sector Undertaking) which is coming with a Rs 480 crore IPO by selling 4 crore shares at around Rs 113-120.The Company is offering 18% of its equity in the offering which would give it a market capitalization of roughly Rs 2500 crore ($550 million) at the upper end of the price band.Note there are a large number of mid cap and large cap PSU banks listed on the Indian markets.Note most of the PSU banks have seen a very good bull run in the last year and a half significantly outperforming the rest of the market.However the last 3-4 months have been tough with a LIC Housing Finance Scandal implicating top PSU Bank Officials for taking Bribes for Loans.The rise in deposit rates and tight liquidity has also hurt the sentiment for PSU Bank stocks.However,Banking remains one of the best ways to play the Indian growth story as financial inclusion remains very low.PSU Banks in general trade at low valuations compared to the private bank peers and mid cap PSU banks at lower multiples than larger ones like SBI,Bank of Baroda and PNB.
Punjab and Sind Bank seems a no brainer due to its significant discount on its fair valuation.At 5x P/E and around 1.2x P/B ,Punjab and Sind Bank is being sold at a substantial discount to the rest of PSU banks which are lower quality in terms of growth and margins.There are some mitigating factors like the low NIM ratio however the valuation more than covers for that up.The only problem in case of the Punjab and Sind Bank IPO is going to be oversubscription.Like MOIL IPO which saw 55-60 times oversubscription,same thing could happen here also.
India’s Banking Sector is highly profitable earnings very high Lending Deposit Spreads.India’s Central Bank RBI has said that this spread (NIM) needs to come down in order for India to grow by double digits.However the Banks are in no mood to change their highly profitable business model.With India’s Economy growing at a rapid pace the banks are seeing high credit growth and net interest income as well.They are opposed to any change in the status quo which allows them to make supernormal profits in the highly regulated banking sector.Note I am calling the Financial Sector as an Oligopoly because the Central Bank strictly controls the entry of new players in the Banking Sector.RBI has recently proposed giving new banking licenses to some more companies but it won’t change the structure of the industry.
Manganese Ore India Limited (MOIL),the government owned miner has seen massive oversubscription of its IPO being subscribed 55 times and should easily reach around 60 times.I had written that the MOIL IPO price of Rs 340-375 makes the valuation hugely attractive which would lead to oversubscription.The fundamentals of this stock easily command a much higher price given its low cost leadership position in the fast growing Indian market.The valuation of the company was compelling even at a 25% higher price point as I had written earlier but at around Rs 6300 crore,MOIL had become a no brainer.
While some of the oversubscription could also have been due to people’s expectation of oversubscription,I think most of the demand was fundamental in nature.The Indian primary market is showing huge demand for quality stocks.Junk IPOs unless they are not manipulated are showing weak demand .Somewhat doubtful IPO of Claris Lifesciences was forced to decrease its price by 20% as there were not enough takers for the issue.
Asian Development Bank (ADB) has planned $2 Billion in Annual Green Investments in power hungry countries of Asia.For this the multilateral institution has sold multi-currency bonds in Japan to populate its Renewable Energy Fund.Note Green Energy is a capital intensive business and requires large amounts of low cost capital which is difficult to get in developing emerging markets of Asia.ADB is meeting this intermediary gap of funneling low interest capital from developed markets like Japan to capital deficient countries like India.Note ADB is already financing Asia’s largest solar photovoltaic plant in Thailand.