Bank of Baroda- Sharp correction provides an entry point :: JPMorgan

We reiterate BOB as Overweight, with 52% upside implied by our Mar-14
Rs850 PT. The stock has corrected sharply in recent weeks, and FY14E
valuations are close to historic lows at 0.6x P/BV and 4x P/E. We see two
distinct triggers – a) easy money market conditions cushioning asset yield
pressures and margins therefore holding up, and b) some relief on asset
quality via aggressive recoveries. We believe the recent correction was
more driven by broad market conditions (particularly the currency) and
there has been no significant worsening of fundamentals to support this.

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 Positive#1: falling rates. Money market conditions are improving –
liquidity is now comfortable with LAF borrowings down to near-zero
and bank CDs are down 20bp in the last month (down 120bp since the
Feb peak). BOB, as one of the weaker deposit franchises among PSU
banks, should benefit on COF and offset asset yield pressures.
 Positive#2: NPL recoveries. We see a greater resolve by BOB (indeed,
all PSU banks) to recover NPLs – both due to pressure from the MoF
and internal reorganization to address this problem. In a weak economy,
recoveries are not easy but the poor performance so far means that there
is low-hanging fruit which should keep the momentum going for 1-2
quarters. This will help offset the continued momentum of high
delinquencies expected in 1H FY14.
 Recent correction led by macro. We think the recent price correction
was led largely by macro – long-term charts show BOB strongly
correlated to the currency and sharp bouncebacks when a spell of rupee
weakness ends. True, the rupee correction has weakened fundamentals
somewhat (NPLs among importers and offshore borrowers should rise)
but not to the extent that the stock price correction warrants.
 Historical-low valuations. The stock trades at historical-low valuations
on P/E and P/BV. In that context, we see fundamentals improving at the
margin. We are 7% ahead of consensus EPS, mainly from NII – our opex
and credit cost assumptions are quite conservative. We think the stock is
poised for a bounceback and reiterate our OW recommendation.