Why ICICI Bank's 260% Profit Growth is Not Exciting

Who are the prettiest of them all?

The economist John Maynard Keynes once wrote these words about a hypothetical newspaper contest back in 1936.

Readers would be shown 100 photos and asked to choose the six prettiest girls. The prizes would go to the readers who chose the girls winning the votes most frequently.

Naive entrants selected the prettiest girls. The smarter readers chose, not the prettiest girls, but the most popular.

The road to winning the contest was figuring out the chances of winning votes and not figuring out who is pretty.

Turns out, as a I recollect this, there is a beauty contest underway at Dalal Street too. Investors are falling over each other to bag the most popular stocks.

And many are confusing the pretty with the popular.

In no way, do I mean to undermine what investors are doing.

But stock markets are, after all, a marketplace when investors bid up the prices of the stocks, they think will eventually become most popular.

And vice versa.

Newspapers, television channels, brokers, advisors, and friends help participants with tips on stocks that are currently looking the prettiest.

So, investors who are too lazy to think through it, end up buying the lame pretty stock than the potentially popular ones.

I am particularly referring to a stock that is grabbing all headlines: ICICI Bank.

Posting 260% YoY growth in profits for the March quarter of FY21 was no mean feat for India's second largest private sector bank.

It's understandable the stock of ICICI Bank is now featuring prominently on Dalal Street's beauty contest. Brokers are busy stoking its popularity.

But investors need to understand the math behind the numbers.

They must check whether the bank fared well in the previous instances of cyclical credit risks.

And most importantly, whether they are paying too much for the stock.

To put it simply, they must look beyond basic appearances.

Ideally, a lending entity should ensure adequate provision cover for the incremental loans during Covid times.

ICICI Bank's healthy credit growth is hardly backed by such provisioning, which makes me wary of the bank's credit quality in the future.

ICICI Bank has never been immune to the cyclical risks of credit quality during periods of economic stress. It may not be any different this time.

ICICI Bank is, of course, not the only case of such a pretty damsel on Dalal Street.

A couple of days earlier, a NBFC named Bombay Oxygen, topped the charts simply because of the word Oxygen in its name. The stock gained 140% in two weeks.

Then there is IOL Chemical, a bulk drug supplier for pain medication Ibuprofen. The stock had doubled within days in late 2020.

The fear of missing out (FOMO), in a bull market, coerces novice investors to buy the most talked about stocks at any price.

But like in the beauty contest, not every pretty stock will stay popular.

It's just a matter of time before you hear the words... Price, meet Value!

Warm regards,

Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)