Are banking stocks a good buy now?

Average net asset values of diversified equity funds rose for the first time in eight weeks for the week ended July 11. Fund managers made tentative purchases in beaten down banking stocks, while pressing sales on software companies after Infosys Technologies Ltd. did not raise its dollar guidance for sales and profit for the second quarter. However, investors are still down anywhere between 15 percent and 45 percent on their investments so far this year. 

Banking funds, especially those investing in the sector index and having a higher exposure to public sector banking companies such as State Bank of India and Punjab National Bank posted sharp gains last week. The rise came despite increasing inflation, higher bond yields and some negative news on the accounting treatment for marked-to-market losses banks’ bond portfolios following hardening of lending rates. 

Reliance Banking Exchange Traded Fund, Banking BeES, Kotak PSU Bank ETF and PSU Banking BeES all rose by between 5.3 percent and 5.7 percent last week. But such gains offer little respite to investors who have seen their assets erode between 45 percent and 46 percent in these funds since the start of 2008.  

Although nothing positive has emerged for banking shares in the past week, some analysts attribute the bounce back to the emergence of value in leading stocks. For instance between January and July, State Bank of India has retraced 55 percent. Its rivals in the private sector space – ICICI Bank Ltd. and Kotak Mahindra Bank Ltd. – have experienced worse.  While forecasting stock prices remains an inexact science and the banking sector continues to face the so-called headwinds of a rising interest rate cycle, slowing GDP growth, drooping industrial production and hardening inflation, it is in crises such as these that value investors shop. 

Perhaps Dalal Street has built in too much of pessimism and may be some stocks have overshot on the way down.  The quarterly performance of Axis Bank Ltd. is a case to point.  The market was expecting the bank to post a quarterly profit in the vicinity of 230 crore rupees. Axis Bank came up with an earnings number of 330 crore rupees versus 174 crores in the same quarter last year. 

Amongst equity diversified schemes Principal Junior Cap was the top gainer with a weekly return of 4.1 percent. The fund, with assets of 44 crore rupees, has Axis Bank as its top holding (no surprises here!). The scheme has also invested 6.8 percent of its assets in pharmaceutical company Lupin Ltd.  A price of below 700 rupees on Lupin implies a price earnings multiple of 13 times and a price to sales ratio of 1.6 times - this for stock whose earnings are expected to grow 35 percent in the year to March 2009. Perhaps the market is yet again overlooking something. 

While banking sector funds saw some respite, schemes investing in the technology industry took it on the chin. Infosys, India’s second largest exporter of software services, failed expectations when it did not raise its second-quarter dollar guidance on July 11, while announcing a better than forecast profit figure for the first quarter. 

Infosys, the fifth most popular stock in equity fund portfolios, triggered a slide across the sector. The stock remains a heavyweight within schemes – it is the top holding in 16 funds and is amongst the top five stocks in 122 schemes.  UTI Software Fund and Franklin Infotech Fund posted the biggest losses last week even as they exposed investors to the perils of concentrated holdings.  UTI Software, which has a fourth of its 76 crore rupees invested in Infosys, shed 2.6 percent. Franklin Infotech, with 43 percent of its 130 crore rupees tied up in Infosys, dropped 3.2 percent.

By Shailendra Bhatnagar, CNBC-TV18

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