Strategic Portfolio Adjustments: Exiting PSU Banks – Unraveling the Numbers

Introduction:

In the dynamic world of stock market investments, strategic portfolio adjustments are crucial for maximizing returns and minimizing risks. In our last rebalances, we made a decision to divest from two prominent PSU banks, Punjab & Sind Bank and Uco Bank. In this blog update, we delve into the fundamental analysis that led to this strategic move, highlighting key red flags and performance metrics that guided our decision-making process.

Punjab & Sind Bank – Unveiling Concerns:

High Interest Payments vs. Earnings:

The bank’s financials raised concerns as interest payments soared compared to earnings, signaling potential stress on profitability.

Declining RoCE in the Last 2 Years:

A notable decline in Return on Capital Employed (RoCE) over the past two years suggested a dip in the bank’s ability to generate returns on its invested capital.

Quarterly Net Profit and Profit Margin Decline (YoY):

The downward trajectory of quarterly net profit, coupled with falling profit margins on a year-over-year basis, indicated operational challenges affecting the bank’s bottom line.

Low Interest Coverage Ratio:

The bank’s low interest coverage ratio raised concerns about its ability to meet interest obligations, posing a potential risk to financial stability.

Poor Sales Growth:

A lackluster sales growth performance further underscored the challenges faced by Punjab & Sind Bank in expanding its business operations.

Uco Bank – Analyzing Weaknesses:

Very Low Dividend Yield and Earning Yield:

Uco Bank’s dismal dividend and earning yields suggested limited returns for investors, raising questions about the bank’s income-generating capacity.

Poor Returns on Assets (RoA):

The bank’s subpar RoA over the past three years indicated inefficiencies in asset utilization, potentially hindering its ability to generate returns for shareholders.

Quarterly Net Profit Decline (YoY):

A significant 18.85% YoY decline in quarterly net profit, especially when compared to the sector’s average net profit growth, highlighted operational challenges affecting Uco Bank’s financial performance.

High Price to Earning Ratio (PE) vs. Sector:

Uco Bank’s elevated PE ratio in comparison to the sector average suggested that the stock might be overvalued relative to its earnings potential.

Inefficient Return on Equity (ROE):

With an ROE below 10%, Uco Bank demonstrated an inefficient use of shareholder capital to generate profits, raising concerns about long-term sustainability.

Conclusion:

In light of these key red flags and performance metrics, we removed Punjab & Sind Bank and Uco Bank from our portfolio during our last rebalances.This strategic decision aligns with our commitment to optimizing portfolio performance and managing risks. As market conditions evolve, it is imperative to reassess and reallocate investments to ensure alignment with our investment objectives and principles. Stay tuned for future updates on our evolving portfolio strategy.

Ashish Kumar,

Smallcase manager and founder of Stoxbazar

ASHISH KUMAR•SEBI Registration No: INH100008939

FIRST FLOOR, D-104, krishna park, New Delhi, South East Delhi, Delhi, 110062

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