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Many predictions are floating around about where the market will be in the next five years. The honest answer from my end is “I don’t know”. My job is not to predict the market or the prices of the individual stocks.

You cannot predict the ‘uncertainty’ and markets are uncertain every day and every second. Looking at the fundamentals of any business, the only thing I can do is, evaluate its expected intrinsic value (which is my beacon whether to buy or sell) which in the short term has no relationships with its market price. But, in long term (around 7 -10 years) prices do follow its intrinsic values.

If we go a year in the flash back, banking sector, especially PSU banks were not considered worth to invest as many people considered there is a bubble in their NPA’s. There is no bank in this industry who doesn’t have NPA’s. The by-product of this business is NPA’s and what most matters in this business is how you manage them.

Suddenly, in last 3-4 months we have witnessed banking sector has climbed more than 50% from its 52 week lows. Fundamentals have not changed, but perception of investors towards these businesses have changed. There is more liquidity that has emerged in this sector.

What I am doing in this blog is studying closely the ‘Income Statement’ of banking business. What are their income sources of the bank and how do they spend them. Now, this is a small part of our research exercise and you should do the complete research and satisfy yourself before taking any investment decision.

In our last blog, we found that to earn Rs 100,000 per month we need minimum Rs 1.20 crore capital outlay to invest in the IT sector. Let us see how much is required to own a bank in this country today.

Name

Number of shares

Price/Share

Total Capital outlay

Axis Bank

9,136

Rs 1,967

Rs 17,970,512

JK Bank

4,784

Rs 1,659

Rs 7,936,656

Yes Bank

26,374

Rs 569

Rs 15,006,806

ING Bank

32,284

Rs 650

Rs 20,984,600

HDFC Bank

33,241

Rs 819

Rs 27,224,379

ICICI Bank

12,275

Rs 1,492

Rs 18,314,300

Kotak Bank

36,210

Rs 900

Rs 32,589,000

What You Should Know:

The number of shares is calculated are on the basis of 2014 Income statement. Remember, the prices of stocks in the market are traded on the basis of their future earnings. So here is what analysts are expecting growth in their earnings for the year 2015.

Name

Earnings Growth for 2015

Axis Bank

17%

JK Bank

7%

Yes Bank

18%

ING Bank

11%

HDFC Bank

22%

ICICI Bank

15%

Kotak Bank

17%

Looking at the price tags of these businesses, the only bank which is trading at discount to our estimated intrinsic values is JK Bank.

If you are buying or accumulating any other banks than JK Bank, I hope you do have a very strong rationale behind it.

If our buying decisions are not biased by the fluctuations of the price in the market, there is no reason why we can’t hold any stock for ten years even if stock market stops functioning as Warren Buffett mentioned once.