Aashish Tater of Fortunewizard.com feels IFCI will get the banking license by either merging with LIC Housing or Tourism Finance. Indian Overseas Bank will be able to raise USD 500 mn through ECB for five and half years for expansions abroad, besides government money at Rs 78.56 coming in July, thus strengthening its balance sheet.
Aashish Tater, Head of Research, Fortunewizard.com, is bullish on IFCI and Indian Overseas Bank. From the risk reward perspective from the next two months, IFCI can give a 40-50 percent return from current levels. If traders were to hold Indian Overseas Bank for the next two and half years they will get at least 40-60 percent return gradually and the amount of dividend that these PSU banks are offering is also very lucrative.
If you see the entire market scenario, take the last two years snapshot the weighted average Nifty index is 5678. We ran our quant models from three perspectives. First of all the W that we look for is right now a pattern in IFCI itself. If you see the entire next two months planning we feel IFCI is one entity that will get a banking license through merger and that merger could happen either with LIC Housing because that is the only listed space that has actually applied for or Tourism Finance Corporation of India because this particular asset otherwise is a dead stock for investment.
Now take two months perspective, what happens is you get a dividend yield of 5 percent on the stock and you abstain from it if they do not get the license. However, if they get this license either through merger or they get merged with Tourism Finance and eventually get the license. The highest share is from the government side so that particular asset will definitely see some kind of positive movement. If you see last two and half years when this particular story of banking license going on, the weighted average price was 52.5 on upside and on downside it was roughly around at 19.6-19.7.
Now from risk reward perspective from next two months it is not even a rupee or two but there is a likely possibility that you get 40-50 percent return from current levels. So we feel that next two months will be very interesting for companies like IFCI where there will be talks of banking license going on and this is one contender. Because it is weak we feel this will be either merged to get this banking license. So it is more of a quant call that we have taken on this particular stock from a shorter term perspective where we feel even if we lose we will not be losing much on downside because of the valuation it is right now trading at. But on potential upside there is 50 percent coming if what we are forecasting, what our models are forecasting can actually go through.
On Indian Overseas Bank (IOB)
If you see the entire Bank Nifty to Nifty ratio it is trading at four and a half years low and given that we were negative on the entire banking space last time when I talked about Bank Nifty, we said that the entire Bank Nifty is overbought and more index inclusions are actually going to create panic and it had led to distribution.
Now what has happened is you see the management commentary post the result. They say a part of their restructured loan will be factored into the next quarter. The government money that they were about to infuse at Rs 78.56 is about to come in July itself. So that will strengthen the balance sheet part.
Take another call from management perspective. They say they will be able to raise USD 500 million for five and half years for their expansion in abroad because ECB is not allowed in India. But for expansion abroad they will be able to do this. So republic of Korea, Mongolian is where they are trying to expand. So taking that angle, we see the balance sheet, after that Rs 1,000 crore infusion and the lower cost of debt we feel the fair value of this stock should be somewhere around Rs 55-58.
The three things that market is right now focusing on are, first the asset quality. We ran this particular model and we feel the worst at this particular balance sheet from here on is another 10 percent. So you are getting Rs 35-36 that is the worst case scenario for this particular stock given the NPA that has been left on the restructured aspects as well as NPA going back. Because all the big loan book which has actually defaulted has already been factored in the balance sheet.
Now take another scenario. The bank is constantly looking for recovery and they have done a good amount of recovery which will again be reflected even in the next quarter results itself. So what will happen is asset quality will improve substantially from current levels. Any surprise on upside market tends to reward very fast. We have seen what has happened to Punjab National Bank. On one result day the stock gives you 15 percent return just because of a small recovery because the excess short that is built into the Non-Banking Financial Banking Companies (NBFCs) and the banking system we feel if someone takes a balance sheet call on the stock, there is a likely possibility and hold for next two and half years they will get at least 40-60 percent return gradually and the amount of dividend that these PSU banks are offering we feel this is very lucrative.
You can make a scattered purchase because next six months is going to be challenging for the entire banking scenario. But the scattered purchase will give you tremendous returns from current levels in the banking PSU space.
Disclosure: Aashish Tater does not hold any personal position in the stocks.