Chart Fun | Humpty Dumpty Indian Financials

When Humpty Dumpty had a great fall…

Short description of a Financial

  1. Raise money from strangers.
  2. For short tenors.
  3. Set some money aside. Supposedly for safety.
  4. Lend to strangers.
  5. …who often borrow for strange pursuits.
  6. …for very long tenors.
  7. …that’s usually longer than the banker’s tenor with the bank.
  8. Lend to strangers…who others don’t want to lend to.
  9. …who often borrow for stranger pursuits.
  10. …who may, occasionally, not even exist.
  11. Some borrowers go belly up.
  12. Grow loan book faster. This ensures the bad stuff doesn’t stick out.
  13. More borrowers go belly up.
  14. Pray.
  15. A large institution goes belly up.
  16. A very large institution goes belly up.
  17. Liquidity tap goes kaput.
  18. Banker quits. Usually, never to be heard of again.
  19. Responding to prayers, government steps in.
  20. Bail out.

Praying is the most critical.

India financials have been at the receiving end of a wallop in September.

Some charts to capture the present state of affairs.

Who’s cheap?

The almighty drop in equity prices across financials has raised murmurs on the potential cheapness of the equity.

Grey Zone depicts universe below the average value for respective axes.
x-axis | 2018 Price change
y-axis | Variation from 5-year average Price/Book value
Bubble size | 5-year average ROE
Grey Zone | Universe below the average value for respective axes

Most companies have witnessed sharp drops in price in 2018. Many have grown cheaper relative to their own 5-year valuation averages. A handful have enjoyed valuation expansion and price gains.

Size matters?

x-axis | 2018 Price change, Variation from 5-year average Price/Book
y-axis | Market Cap in INR Crore (US 1 MM = INR 7 Crore)

As usually happens in price routs, smaller companies have borne the brunt of selling pressure triggered by risk aversion. Large companies have fared relatively better.

The fall has increased cheapness across the board. Smaller companies have experienced sharper valuation compression.

How much further can Humpty Dumpty fall?

How fair is the current valuation multiple? The historical valuation multiple?

Which Humpty Dumptys can be put back together again?