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Of Cheap Valuation of PSU Banks and Our View on IPO of Lemon Tree Hotels Ltd
Tue, 27 Mar Pre-Open | Parth Parekh, TM Team

NSE PSU Bank Index Surges 5% in Yesterday's Trade

NSE PSU Bank Index surged by almost 5% in yesterday's trade. Having said that, the 5% surge looks miniscule when compared to the correction the PSU Banks have underwent since 25th October 2017. This was the date when bank recapitalization of Rs 2.1 trillion was announced.

Loss in Market Capitalization of PSU Banks from 26th October 2017 to 26th March 2018
BankPrice as on 26th October 2017Price as on 26th March 2018Loss in Market Cap (in %)Current Price/ Book Value10 Yr Average Price/ Book Value
Punjab National Bank21396-55%0.61.2
Union Bank of India18691-51%0.40.7
Allahabad Bank8448-43%0.30.7
Andhra Bank7041-41%0.30.9
Syndicate Bank8256-31%0.40.8
Bank of India193102-47%0.41.1
Bank of Baroda185141-24%0.81.1
SBI Bank321246-23%1.11.4
Source: ACE Equity

The healthy correction has led to these banks trading at attractive valuations. All the banks as mentioned in this table are trading below their ten-year median price/book value.

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Given the cheap valuations, are you planning to invest in these banks?

Now, there is a term in investing called Value Traps. Value traps are stocks that are trading at very cheap valuations. These stocks can trade cheap forever and never really recover in terms of stock price performance. There is a reason for this. Structural problems in the company.

The structural problem with public sector banks is the credit appraisal policy. In the greed of balance sheet growth and pressure from government, these banks have lent to stressed sectors such as power and iron & steel. The result- Gross Non-Performing Assets (GNPA's) of public sector bank have shot up to 11.03% in FY17 as compared to 4.97% in FY15.

Unless such structural problems are resolved it is highly likely that some of these banks act as a value trap and continue to deliver miserable stock returns in the long run.

Should One Subscribe to Lemon Tree Hotels Initial Public Offer?

The initial public offer of Lemon Tree Hotels Ltd is up for grabs. The issue was subscribed by 24% at the time of writing.

The proceeds from this IPO of around Rs 10.9 billion will go to the selling shareholders. Promoters are not participating in the offer for sale and thus their holdings post the IPO will remain the same at 29.16%.

Lemon Tree Hotels Ltd. is the India's largest hotel chain in the mid-priced hotel sector, and the third largest overall, on the basis of controlling interest in owned and leased rooms, as of June 30, 2017 (as per the Horwath Report). It is also the ninth largest hotel chain in India in terms of owned, leased and managed rooms, as of June 30, 2017. The company operates in the mid-priced hotel sector, consisting of the upper-midscale, midscale and economy hotel segments.

A significant part of the company's revenues (57% in FY17) comes from the corporate customers. The company opened its first hotel in 2004 and the count as of 31 July 2017 stood at 40.

To know our view on this IPO, you can read our IPO note on Lemon Tree Hotels Ltd (requires subscription).

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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