RBS suggests Buy SBI : target Rs3,703

State Bank of India: What if SBI dilutes equity ?
SBI plans to raise equity in the medium term, which prompts our scenario
analysis on post dilution book value and valuation multiples. We factor in no
equity dilution in our estimates, keep forecasts unchanged and roll forward
valuations to FY12F. Buy maintained, with a higher target price of Rs3,703.


Equity dilution likely in the medium term
The tier-I ratio was 9.8% as of June 2010, which we believe is comfortable. Management has
said it is looking to raise equity capital of about Rs200bn via a rights issue for existing
shareholders in the medium term. The government of India (GOI) holds 59.4% stake in SBI
as of June 2010. We believe the GOI will likely subscribe to any equity offer by SBI in order
to maintain its stake at current levels. Note that our estimates do not factor in equity dilution.
Post dilution BV multiple appears comfortable
Assuming SBI raises Rs200bn in FY12 at the current market price, its post dilution
standalone FY12F book value would increase to Rs1,553 (vs current estimate of Rs1,392,
see Table 1). Further, adding the FY12F book value of associate banks of about Rs354,
means the stock is currently trading at 1.7x FY12F book value, on our analysis. However,
post dilution the standalone RoE should come down to about 16% or so, from about 18% on
our current estimates (without any dilution).
SBI Amendment Act passed; GOI’s minimum stake requirement now at 51%, from 55%
The government has passed the SBI Amendment Act. The key changes are: 1) the GOI’s
minimum regulatory holding requirement will now be 51%, from 55% earlier, and 2) SBI can
now raise preference share capital and issue bonus shares subject to regulatory approvals.
No change in estimates; we roll forward valuations to FY12 and raise TP to Rs3703
SBI remains our top pick among public sector banks, given momentum in core earnings,
receding concerns about asset quality in an improved macroeconomic environment and
relative cushion against rising interest rates due to high CASA proportion (48% as of June
2010). We keep earnings estimates unchanged, but roll forward our valuations to FY12F,
which leads to a higher SOTP-based target price of Rs3,703. At our target price, SBI
(including associates) would trade at 2.4x FY12F adjusted book value (1.9x FY12F book
value, if we assume equity dilution as stated above).