March 2017


From last 2 weeks, every morning my mailbox is filled with the same mail, is 9000-9100 the intermediate top or is it a big breakout.

Today i am going to give you all the data you need to analyse if its the start of a new trend or a intermediate top.

1) PE Ratio/ P/B Ratio/ Dividend yield. (Ratio’s which everyone Follows)

2) Market Cap to GDP (Ratio which Warren Buffett Uses)

3) EPS Growth Rate

4) Dow Theory Breakout

5) Currency viz Emerging Markets

6) Flow of Funds

7) VIX

8) IPO Data

Factor 1 = PE Ratio/ P/B Ratio/ Dividend yield (Traditional Valuation Parameter) 

In 2002-2003 All the above parameters were giving clear indicators for a Buy & in 2007-2008 all the parameters were far stretched which led to a Bear Market Rally. In Current Scenario 2016-2017 PE looks on the higher side while P/BV is well below the previous high and no clear evidence is seen.

Factor 2 = Market Cap to GDP

This is Warren buffett’s favorite parameter to understand if stock market is overheated. Market Cap to GDP Stands at 80% which is somewhere in between overheated and Cheap. The Parameter Doesn’t give us any clarity.

Factor 3 = EPS Growth Rate – Sensex EPS Growth for the 8 years has been well below the nominal GDP growth. Corporate earnings growth are normally mean reverting and its expected the earnings growth will catch up with the nominal GDP growth of about 13%. Sensex EPS is pretty much same since 2014, but the consensus is strong revival for next 3-4 years.

Factor 4 – Dow Theory Breakout – Nifty successfully closed above 9100 which was its previous intermediate top suggesting that nifty is breaking out. 9000 zone was testing 6 months back in August, and has now made a CUP & HANDLE pattern suggesting at target of about 11200. The Caveat here is that Sensex hasnt crossed its previous high yet, but a break above 30,000 for Sensex for more than 2 trading sessions would confirm a pattern breakout.

Factor 5 – Currency viz Emerging Markets – INR has been the most stable currency in last 4 years among emerging markets. Stable currency attracts foreign capital. Last week the USD broke important support levels of 66 and suggest a major breakdown against the INR. If USD:INR stays below 66, you can expect the rally to continue and probably gain more momentum as well.

Factor 6 -Flow of Funds – Bull Markets are made of liquidity, the domestic investors were net sellers from 2011 to 2015, and have turned net buyers in 2015 and 2016. We believe there is a 5 year cycle which investors go through and till 2020 we expect flows to be very strong. FII’s are a little difficult to predict, and we don’t have the analytical capability to understand FII flows.

Factor 7 – VIX – This indicator gives me goosebumps, because market are expecting very low volatility based on prices of options. The positions are pretty much short volatility i.e. markets won’t correct much. The crowd is normally right except at the turning points. This Indicator is showing that the markets are very complacent which is a dangerous sign.


Factor 8 – IPO Data – We divide IPO’s in 3 phases
1) Bear Market – Good Companies, Cheap Valuation

2) Bull Market – Good Companies, High Valuations

3) Euphoria – Bad Companies, High Valuation.

The IPO data tells us that we are in phase two of the bull market where good companies are coming at high valuations. They are normally PE investors who are exiting the company or booking a partial portion of their equity. IPO data tells us that we are atleast 2 years away from Euphoria Top.

Conclusion and Stallion’s View – The Market is definitely overbought on the short term, but downside seems limited to 8500. The Markets are well poised for higher levels in coming months. We are not in the cheap market zone, nor in the expensive market zone, we are somewhere in between these levels. Technically once Sensex closes above 30,000 for more than 2 days, there will be a major breakout which can take the Sensex to 37,000. Overall In short term there can be volatility of 5%, but in next 12 months, 24 months, 36 months expect the markets to deliver 12-18% CAGR returns. Out of the 10 Indicators we have tested, 5 are recommending a Buy, 3 a hold and 2 a SELL. We at Stallion have concentrated our portfolio in the Sector in Play, these companies are growing at 4-5x faster than the real GDP growth, and are reasonably confident that we will beat the market consistently.

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Ace Stock Picker Vijay Kedia has added more shares of Karnataka Bank this Quarter and now has made this as his 2nd largest holding after Sudarshan Chemicals. He now owns 31 Lakh shares of Karnataka bank. In an Interview to ET now, he said the he believes that the karnataka bank is a 4 bagger in next 3 years.

In the Next 3 mins you will understand why exactly Vijay Kedia is bullish on Karnataka Bank.

Stallion’s View – When we at Stallion buy a bank, we look at the Banker rather than the Bank only. We hold ****** Bank in our portfolio, the real bet is on the banker, we have seen how Chanda kochhar of ICICI has destroyed value in last 8-9 years whereas Aditya Puri of HDFC has made a killing with the right approach. Rana Kapoor of Yes bank and Sobti of IndusInd have delivered mind blowing value though both have different strategies but they both have great credit quality.

There is going to be massive consolidation in the banking industry especially with payment banks, small finance banks etc coming in, this gives us an opportunity to look at small private sector banks like KTK bank, DCB bank, South Indian Bank, City Union bank etc.

So broadly an investor can divide banks in 2 lots 1) Banks with good bankers for long term secular growth like RBL, Indusind, Yes bank 2) Banks which will be acquired sooner or later which are very cheap now like KTK bank.

About Karnataka Bank – Karnataka Bank is one of the oldest private sector banks with time tested history of 92 years. It offers wide variety of corporate and retail banking products and services to ~8 million customers. The Bank enjoys presence of 2,072 service outlets with 738 branches, 1,334 ATMs in 486 centres across India as on Dec 31, 2016. Bank has the strongest presence in South India with 577 branches. Branches of KTK in Top 5 States: Karnataka (458), Tamilnadu (49), Maharashtra (44), Andhra Pradesh (34), Delhi (21)

Lets Understand Karnataka Bank Business – We will look as if we are Acquiring this business, as its an acquisition target.

Factor 1 – Network = Karnataka Bank has 736 branches and 1319 ATM, whereas South Indian Bank has 839 Branches and 1306 ATM’s. They both have a similar balance sheet size of about 90,000 Crores and 1,00,000 respectively whereas both CUB and DCB are small in reach and Size.

Factor 2 – How much CASA do they have?

CASA is important as it shows how many retail customer does the acquiring company get, as mentioned before Karnataka bank has 80 lakh customers. As on 30/9/2016 (Pre-Demonetization), Karnataka bank had a CASA of 26.3% which is better than peers at 21-22% making it a better acquisition target compared to others

Factor 3 – Valuation – Karnataka Bank has a Market cap of 3891 Crores whereas south Indian Bank has a market cap of 3107 Crores which is cheap considering their balance sheet size of 90000 Crores and 104000 Crores respectively. They both are trading cheap because they have gross NPA’s between 3.5-4%. The Asset quality of DCB and CUB is a lot better as Gross NPA’s stand at 1.75% and 2.69% respectively. Karnataka bank and South Indian bank trade at a P/B at 0.66 and 0.68 respectively whereas DCB and City Union trade at 2.36 and 2.64 respectively.

* note the Book value of KTK bank has changed this quarter to 180 per share due to its right issue. We have used pre-rights data just for comparison purpose

Adjusted Book Value – We believe the Correct way to value Karnataka bank would be Adjusted book value. As per our conservative estimates the Adjusted book value per share of Karnataka bank is 155 per share after adjusting for right issue. The CMP is 135, is 0.87 Price to Adjusted Book.

Vision 2020 – As per the Karnataka Banks Vision 2020 document, Bank`s total business turnover is projected to increase in a progressive manner to touch 1,80,000 crore from 85000 crores in FY2016 growing at 21% with deposits of 1,00,000 crore in 2020 from 50500 Crores in 2016  growing at 19% and advances of 80,000 by March 2020 from 34000 crore in FY 2016 growing at 24%. We at Stallion Asset believe that these estimates will not be met but the bank will grow at 10-15%

Conclusion – We believe that this bank might be acquired in next 2 years at 2-3 x Adjusted book value, it would be a great add to any large bank. South Indian bank also looks good on Valuation and very limited downside risk whereas upside can be 2-3x in next 2-3 years.

Disclaimer – We Don’t have positions in Karnataka Bank. Use this for education Purpose only.


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