Be Cautious of this sudden rally!!!

The Nifty index has rallied from 6220 levels to close to 6520 levels now during the 5 trading days this week. Nifty has not just hit a new all-time high today, it has rallied over 100 points after crossing the previous high. Several large-cap stocks have gained more than 5% today & over 20% in the last 5 days. But what is noteworthy is that despite such huge rally in large-cap stocks, the Advance:Decline ratio is close to 1:1, i.e. the rally is broad-based. Hence this is a warning sign.

I am a bit skeptical of this sudden rally we have seen this week. Since it is focusing on a limited number of sectors & that too only on the large-cap stocks, we need to keep caution while deciding to trade hoping for the rally to continue this way for more days. I think this rally is being driven by foreign money which is here for short trade, not here for longer term. The logic behind this thinking is: As a long term investor, a fund manager would love to buy at lower & lower valuations. He wouldn't suddenly jump into buying in a way that will drive up the prices at such frantic pace. And he wouldn't even jump in when the prices are moving up in this fashion. This kind of movement is generally seen only when short term trading money is driving up or down the prices of only a basket of stocks. Traders are the ones who would love to create euphoria in the market in such a way that others also start jumping in and then they can book their profits.

All I wish to say is that those looking to invest in the stocks, shouldn't buy during this rally. Just wait for some time, things will cool down or stabilise. There is no point in suddenly investing in something which has already appreciated over 20% or 30% in a matter of just 5 days. Traders on the other hand can make a killing in this kind of environment, but it could also burn someone if things cool down as quickly as it has heated up. That's why I would like to caution everyone. 

Yes Bank vs Indusind Bank comparison

I had posted a comparison of Yes Bank & HDFC Bank about a quarter ago. It was mainly because HDFC Bank has always been considered a benchmark for Private sector banks. But there is a huge difference in size of the two banks. HDFC Bank is 4 to 5 times bigger in size because it is more than a decade older than Yes Bank. Now it's time to compare Yes Bank with someone who is of approximately the same size. Eventhough Indusind Bank is also much older than Yes Bank, it got active for good growth only around the time that Yes Bank was born.

I have arranged the 12-Months data for periods ending Dec'09 to Dec'13 for easy comparison for the performance track record of both the Banks over the most recent 4 years. Following are the charts which show easy comparison for Total Income, Interest Expense, EPS and Share price of both Yes Bank & Indusind Bank.

The charts are quite self-explanatory. Indusind Bank was bigger than Yes Bank upto 2009. But Yes Bank has clearly posted faster growth to take a good lead over the last 4 years. By the end of 2013, Yes Bank is now about 20% bigger than Indusind Bank in terms of Total Income. To fund it's faster growth, Yes Bank needed more capital. Yes Bank chose to depend more on Borrowed Capital instead of issuing fresh shares to raise resources. Between Dec'09 & Dec'13, Yes Bank issued about 6 crore fresh shares, while Indusind Bank's Equity Capital expanded by 11.4 crore shares. The result being Indusind Bank's Interest Cost being about 53% of the Bank's Total Income, while the same being 62% for Yes Bank. Despite this higher % of Interest Cost, Yes Bank has managed to post a Net Profit margin which is on-par with Indusind Bank at about 13.7%.

Coming to EPS comparison, Yes Bank's EPS has always lead Indusind Bank, primarily because of the former's smaller Equity Capital. But just look at the difference in EPS of the two Banks & then compare the same with the difference in their respective Share Prices. While Yes Bank's EPS has reached the level of above Rs.42, about 70% higher than Indusind Bank's EPS of Rs.25. Despite this massive lead in Yes Bank's EPS & superior growth performance, Yes Bank's Share price currently trails Indusind Bank's share price by over 20%. While Yes Bank's share price is currently around Rs.305 compared to Indusind Bank's price at about Rs.400/-. One reason for Yes Bank losing some portion of it's valuation is because of the quarrel between families of the founding partners. As soon as the quarrel hit news headlines, Yes Bank's share price started it's downward movement. But the thing is that the issue could get resolved anytime soon and it has not had any impact on Yes Bank's performance as can been seen from the Bank's consistant performance over the last 4 quarters. Sooner or later FIIs and other large funds will realise this and Yes Bank could come back to the valuations that it used to command about a year ago.

My point is: If Yes Bank continues to post growth in line with the Industry's growth or marginally better than that, then it should be commanding valuations in line with other Private Sector Banks.

(P.S.: One reason why Indusind Bank has enjoyed better valuation than Yes Bank could be it's inclusion in Nifty index. Despite Yes Bank being bigger than Indusind Bank, the latter was chosen to be included in the Nifty to represent young modern private sector banks. Maybe the age of listing on the stock exchanges is one criteria to decide on inclusion in the Nifty index.)