Swap PNB with CARE Ratings

Update as on 23rd March 2013

I've completed the swapping. I sold all of my holding in PNB at around Rs 793 (average), and bought CARERATING at around Rs 810 for 75% of the sale proceeds. I'll keep rest of funds and now analyze which would make the best sense to route this amount to - CARERATING or some other existing holding (potential candidates being MAZDA, CROMPGREAV, BHEL, BHARTIARTL and MOIL)

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In my last post, I mentioned the following about these two stocks:

8. CARE Ratings: I subscribed and was allotted 20 shares in the IPO. Since I believe in long term prospects of the industry and the business, I decided to hold on and NOT book 25% profit which came on the listing day. I'm even willing to make more investments in this stock when I have surplus cash and that price is low (the stock has fallen closer to the IPO price in recent weeks), however, any fresh investment after careful incremental analysis only.'

9. Punjab National Bank: This is a pure valuation play - buy known banks when trading at significant discount to their book value to insure against "unknowns" in balance sheet. However, I've committed mistake of not selling this stock when the intermittent re-rating occurs. This stock confuses me - whether to keep it as a short term (3 - 6 months) investment and exploit mis-pricing, or hold it for long term considering PNB's status. I don't think the business is great, especially since it's a PSU bank with command from government which often deteriorates asset quality, and it'd probably be better to be conservative and sell it upon the next rally in stock (and when P/BV comes above 1)

Looking at current price movements, PNB is around book value and there's no clarity on how far can it go. We've seen strong resistance around 900 - 925 range from which it has fallen. Moreover, the very recent sting operation report on private sector banks can keep banking sector in general depressed if not falling, and we're not sure how long can it take PNB to reach back ~920 range from current level of 800.

On the other hand, despite good results and dividend payment, CARE has come closer to IPO offer price, probably on account of profit booking. Although I analyzed it to be reasonably priced at Rs. 750 during IPO, paying slightly higher for a healthy business is not a very bad idea, especially when we're re-allocating capital from a riskier bet to safer, long term story.

I'll start selling PNB and converting the proceeds into buying CARE stocks, maybe in 3 or 4 tranches, since there's a news event (RBI policy) around, and market seems to be at a short term inflection point.

After this action, my portfolio will have no short / medium term bets, and all the stocks are long term holdings.