PUNJAB & SIND BANK IPO - Valuation Attractive, Momentum Doubtful, Timing Problematic

On a total FY’10 income of over Rs. 4300 crore, Punjab & Sind Bank is slightly smaller than the smallest listed public sector bank (PSB), State Bank of Mysore (BSE: 532200, NSE: MYSOREBANK).

But when it comes to net profit, Punjab & Sind fares better than State Bank of Mysore(SBM), and in 2010, had overtaken somewhat bigger banks by total income like United Bank (BSE: 533171, NSE: UNITEDBNK), Bank of Maharashtra (BSE: 532525, NSE: MAHABANK), State Bank of Bikaner (BSE: 501061, NSE: SBBJ), & Vijaya Bank (BSE: 532401, NSE: VIJAYABANK).

On a pre-Issue EPS of around Rs. 27, the Issue which has an upper price band of Rs. 120 is valued at a tad below 4.50 P/E, which is just around one-third of the PSB industry average of 12 odd. By price-to-book-value it comes around 1.14, which is also fair enough.

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Though no PSB is available below 6 P/E, with the cheapest being State Bank of Travancore (BSE: 532191, NSE: SBT), there are good options by book value. For example, small comparable banks like United Bank and Bank of Maharashtra all trade at nearly the same P/BV, and even bigger banks like Indian Overseas Bank (BSE: 532388, NSE: IOB), Syndicate Bank (BSE: 532276, NSE: SYNDIBANK), & Oriental Bank (BSE: 500315, NSE: ORIENTBANK) are available at P/BVs ranging from 1.19 to 1.33.

Now, the problem with PSB IPOs has been that though they have been historically offered at attractive valuations, it has taken much time for them to move into some price momentum, with investors’ money locked-in almost uselessly for many years, with the best examples being small banks like Bank of Maharashtra and Dena Bank (BSE: 532121, NSE: DENABANK).

But once these banks catch the fancy of big institutional investors, they can appreciate like anything, and this is what is happening now with banks like Vijaya Bank and Dena Bank which have an year-to-date price-performance of over 75% and 40% respectively.

But this phenomenon may pose a problem for a new entrant into the listed space like Punjab & Sind Bank, as these banks which have already caught investor fancy and moved into price momentum are still available at comparable and attractive valuations.

Even slightly more expensive banks by P/E like State Bank of Travancore (SBT) are enjoying much momentum having moved up by more than 50% in year-to-date.

Also, Punjab & Sind Bank's IPO comes at a time when the Bankex is under pressure from multiple fronts after having appreciated quite a bit in the last 12 months. The BSE Bankex index had appreciated from 10,100 levels a year back to near 14,800 levels almost a month back, and has since then been on a downtrend, losing over 1700 points during the last four weeks. The housing finance scam and the higher interest regime is expected to continue the pressure on Bankex.

In a scenario like this, investors looking for quicker profits are likely to focus on outperforming PSBs, if they are willing now to bet on this sector at all. Still, on attractive valuations, the downsides in Punjab & Sind Bank IPO is almost nil, even though upsides might take indefinite years to fructify.

Apart from serious damages like a stock market crash or a banking scam, the offer appears good for those investors who are not looking at near-term momentum, but long-term value.