When Billionaire MA Yusuffali walked up quietly to the South Indian Bank counter in January 2014 and scooped up a chunk of 3 crore shares at Rs. 21 each, I knew something big was cooking. I had sounded out the red alert “Does Billionaire MA Yusuffali’s Stock Pick South Indian Bank Signify Revival For Banking Sector Stocks?”
I also pointed out that other savvy investors like Renuka Ramnath of Multiple Equities also held a big chunk of 2 crore shares of South Indian Bank which were bought through a QIP at Rs. 22 each.
Today, just a few months later, at the CMP of Rs. 32, both savvy investors, MA Yusuffali & Renuka Ramnath, are looking at nearly a 50% gain on their investments.
Now, the big news is that Mohnish Pabrai has, through “The Pabrai Investment Fund IV LP” bought a chunk of 196,06,634 shares of South Indian Bank at Rs. 32.50 each. Mohnish bought 1,45,45,500 from Renuka Ramnath’s Multiples Equity and the rest from the open market.
Mohnish Pabrai has fished earlier in the Indian markets and gone back with spectacular results. In an interview to Outlook Business, Mohnish revealed that he had earlier invested in Satyam and Dr. Reddy’s Labs. The investment in Satyam had yielded him a 100x gain for him. However, he added in a grim tone that “I don’t invest in India because there are too many regulatory hurdles”.
Fortunately, Mohnish has changed his mind now about investing in India and ended his voluntary exile.
Now, there are two important questions that we have to probe. The first is why did Mohnish Pabrai choose the banking sector to make his come-back into India? Second, why did he choose South Indian Bank, of all the other top-quality banks available?
The answer to the first question is provided by Mohnish himself. In the same Outlook Business interview, Mohnish pointed out that his USA portfolio was overweight financials because he though they were “extremely low risk” at that point (2013). Mohnish explained that before investing in a financial company, it is important for investors to know two things: is the management honest and competent? If the answers are in the affirmative, investors must pay attention to the valuations. If the companies are trading close to the book value, it is a safe investment.
At this stage, we must also note the excellent advice given by Saurabh Mukherjea of Ambit Capital. Saurabh pointed out that banks are a proxy for the economy. Banks play a pivotal role in the economy and if the economy does well, banks will also do well. Saurabh also explained that it is best to buy mid-size banks like DCB and City Union Bank because they serve the Medium and Small Enterprises, which show the fastest revival in the growing economy as compared to the larger enterprises.
So, an investment in the banking space is really a fool-proof method of participating in the growth of the economy if you don’t want to mess around with infra and capital goods stocks. You just need to ensure that you have a bank which has no Govt. interference, conservative management and low NPAs.
The question as to why Mohnish Pabrai chose South Indian Bank is also an easy one.
Mohnish, in a lighter vein, takes pride in repeatedly calling himself a “shameless clone”, meaning that he likes to check other savvy investors’ stock picks and piggyback on them. In South Indian Bank, he has to trust the instincts of Billionaire MA Yusuffali and Renuka Ramnath, both of whom are accomplished investors. Mohnish knows that you really cannot go wrong by piggy-backing on such broad shoulders!
More seriously, as I pointed out in an earlier piece, South Indian Bank is a sensible investment because it has a strong regional presence and good technology network. It is also a possible acquisition for a big-bulge bank wanting to expand. It has a strong deposit franchise, robust loan growth and improving asset quality. It has a consistent profit growth of 21%+ over the past five years and it’s valuations at about 1.3 times book are also quite reasonable. The stock also offers a dividend yield of 2.15% which protects the downside.
This means that it is not too late for us to clone Mohnish Pabrai’s stock pick and to piggyback on his broad shoulders.
If you don’t have any mid-cap banks in your portfolio, you can also check out Federal Bank. Billionaire MA Yusuffali is the largest shareholder with a massive 3.15 crore shareholding, worth in excess of Rs. 400 crore. The best part is that Daljeet Kohli has issued a detailed research report in which he has called Federal Bank his “top pick in midcap space”. There are several other savvy analysts who back Federal Bank, which you will find referenced in the same article.