The Hindu Business Line : Lotus India Banking Fund: Banking on valuations

With the CNX Bank Index down 40 per cent from its January levels, bank stocks have been among the worst performers in the recent market rout. Does this make it a good time to launch an equity fund that focuses on the banking sector? Lotus India Mutual Fund seems to think so. The fund’s open-ended Lotus Banking Fund is currently open for subscription.

Investment proposition: The fund makes a convincing case for investing in banking stocks at this juncture. First, though fears about interest rate hikes have dented the stock valuation, it argues that banking isn’t an interest-rate sensitive sector.

Second, the impact from farm loan waivers on PSU banks and forex derivative losses on private banks, though much feared, isn’t likely to materially dent earnings, when quantified.

And, third, banking is the only sector in the listed space that can help you capitalise on all the three key themes of the India growth story — consumption, investment and foreign trade. The under-penetration of banking services and avenues for fee-based income also make banks a secular growth story, says the fund.

Valuation: The fund makes the case that Indian banks are trading at attractive valuations post-correction, making this a good time to buy. The Price-Book value ratio for PSU banks is at or below 1, Indian banks are significantly undervalued relative to the rest of the world and the sector’s PEG (a measure of Price-Earnings ratio to growth) is at just 0.6; all suggesting room for stock price appreciation.

Features: Lotus Banking Fund will invest at least 65 per cent of its portfolio in the stocks that make up the CNX Bank Index, in order to deliver a portfolio of “quality” stocks. The balance may be invested in companies outside the index, with stocks selected from a broad spectrum of financial services — NBFCs, insurance, brokerages and so on.

Pros & Cons: If you go by the maxim that one should buy stocks at the point of high pessimism about a sector, banking stocks do appear a good investment. However, weighed against this, are a couple of factors.

One, for investors convinced about the potential of banking stocks, Lotus Banking Fund isn’t the only option available. Actively managed funds such as Reliance Banking Fund, UTI banking and JM Financial Services Fund are already available.

Two, the entire re-rating of the banking sector over the past two years was based on rising FII ownership in the sector; now that FII flows have turned increasingly unpredictable, can the sector regain its past valuations?

Three, given the multiple concerns surrounding the economy and company earnings at this point, the time may not be right for investors to lock into a single theme or sector. Diversified/flexicap funds, rather than theme funds, may be better suited to this fluid scenario, given their ability to switch dynamically between sectors and stocks based on the economic outlook.

AARATI KRISHNAN

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