The year 2025 is expected to be the year of IPOs. After HDB Financial Services, yet another NBFC, Tata Capital, has secured Sebi approval for listing.
When well-funded groups like HDFC and Tata are seeking to leverage the bull market valuations through the IPOs, will others stay behind?
In the last few years, several new-age technology entities have gone public despite being loss-making at the time of their IPOs, including Nykaa (FSN E-Commerce Ventures), Zomato, Paytm (One97 Communications) and Policybazaar (PB Fintech) initially fuelled optimism among investors. However, most of the stocks nosedived in the subsequent months.
But if the stock markets continue to spin a dreamy story of valuations soaring higher, 2025 may see a repeat of 2021.
Some questions need to be answered here. Should investors latch on to IPOs of well-marketed new-age businesses only because of the promise of quick returns? Are they even certain of the business models offering high growth in future? Or are they only facilitating the exit of the VCs and PE investors at steep valuations?
Fact is, some of the most understated and boring businesses that have decades of earnings history fail to get investor interest in bull markets. It’s only when you put the numbers in perspective and evaluate the safety of the business model that you realise what you are missing.
Case in point is the country’s biggest bank and a financial juggernaut, State Bank of India.
The bank’s government ownership, susceptibility to slippage in quality of loans, responsibility of increasing the banking coverage in the country have all put together kept the bank out of radar of growth investors.
True to expectations, the stock of SBI has languished from time to time due to poor quality of earnings growth and balance sheet. But over a longer period of time, say decades, the bank has managed to more than makeup for the lost years.
The bank recently revealed some statistics of the growth in its balance sheet versus the growth in India’s GDP and the numbers are impressive to say the least.
SBI’s profits have grown at a staggering 52,000 times versus the GDP growth of 3,000 times in the past seven decades.
Of course, PSU banks have typically been low-margin, low-return-on-equity businesses with high manpower and branch operation costs.
But over time, SBI has managed to keep a close watch on efficiency metrics like profit per employee. Also, the bank has seen a sharp growth in employee costs to keep up the talent acquisition in new business segments and compete with private sector peers.
The fact that the dividend paid out by the bank has also grown at a CAGR of 14.8% over the past 70 years, shows how the stock has been remunerative not just for the government but also for minority shareholders.
Despite stiff competition from the private sector and multinational banks, SBI has managed to sustain a dominant market share across product categories. Even in the case of technology-led offerings like mobile banking and UPI transactions, the bank has maintained its stronghold.
Being the government’s banker, SBI will certainly, from time to time, face the impact of policy obligations.
However, the bank will sustain a healthy pace of growth and profitability for several decades.
When such stocks are trading below two times book value and 10 times earnings, is there really a need to chase IPOs at lofty valuations?
Happy Investing.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com.
