Punjab & Sind Bank IPO – Very Attractive Valuation makes it a Buy

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.

Advantages

1) Good Growth and low NPA– The Bank has seen a good growth in Advance at a CAGR of 25% in the last 3 years.It NPA are alos quite low at below 1%.The Bank is not a Bad One considering some of the other PSU Banks like United Bank,IOB which have much lower parameters.The Bank has managed to grow its total income by almost 3x in the last 5 years which is much faster than peers.The Bank has performed better than the group average according to RBI.

2) Valuation – The Stock is being offered at roughly 1.1-1.2x Book Value (Net Worth of Rs 2100 crores) which is quite cheap compared to other PSU Banks in the space which trade at around 1.3x.The larger PSU Banks trade at around 1.5-2x which would make Punjab and Sind Bank a bit undervalued.In terms of trailing P/E,Punjab and Sind Bank looks more attractive being priced at 5x of its FY10 Net Profit of Rs 500 crore.That would make the stock at least 20-30% cheaper than the cheapest PSU Bank trading in the Indian markets today.

3) Strong Presence in Punjab – The Company is predominantly a North Indian Bank with almost 40% of its branches located in the Indian State of Punjab which is one of India’s richest states with a high growth rate.

Risks

1)  Central Bank Regulation – The Bank has to follow RBI guidelines in advancing loans to priority sectors like Agriculture (18%) and Weaker Sections (10%) . These sectors have lower margins and higher NPAs in general.The Bank also is heavily regulated by the RBI and has to follow its lead in Debt Restructuring  and Reserve Requirements.In fiscal 2009, the GoI implemented the “Agricultural Debt Waiver and Debt Relief Scheme 2008” under which agricultural loans (including principal and interest) amounting to Rs. 47.72 crore were waived off.

2) High Exposure to Real Estate and Infrastructure Sectors – The Company has its highest exposure to Real Estate and Infrastructure.Note Real Estate Sector in India has a very bad reputation being involved in various scams .Any slowdown in the Indian economy will have a big effect on its loan portfolio.

3) NIM have fallen in the last 2 years – The Net Interest Margin and the Net Margin have consisently fallen in the last 2-3 years . NIM at 2.67% in FY10 seems quite low.Also Net Margin at around 12.5% is also low compared to other banks.

Summary

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.