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STATE BANK OF INDIA (SBI)
PRICE: RS.1889 RECOMMENDATION: BUY
TARGET PRICE: RS.2545 FY12E P/E: 11.9X; P/ABV: 2.0X
Concerns of right issue getting through, elevated slippage during last few
quarters or slower loan growth etc are already in the price after recent
correction (~25% in last 2 months), in our view; recommend BUY on the
stock as valuation (1.1x after stripping value for subsidiaries) is reasonable
at current level.
q We believe SBI needs to enhance its Tier-I capital which came below 8%
at the end of Q4FY11, when it provided Rs.79.3 bn on account of shortfall
in pension liability; this was charged to the reserves which shaved
off ~Rs.125 /share from its BV. We are not very optimistic about GOI contributing
money to the tune of Rs.120bn after looking at their fiscal
health.
q We opine that lower tier-I capital (7.6% at the end of Q1FY12) is likely to
moderate its balance sheet growth and hence we are moderating our
loan growth assumption during FY12E. We are assuming ~16% growth
in both loan book as well as deposits. Our lower loan growth assumption
also emanates from our believe that new management is likely to
continue focusing more on margins (i.e. profitable growth) rather than
earlier strategy of growing market share, even if it had come at some
margin sacrifice.
q Slippage has remained at the elevated levels during last couple of quarters
(average run rate of 2.9% annualized during last 5 quarters), a key
risk, in our view. Moreover, street is also concern about its huge exposure
to stressed sectors like Infrastructure (17.9%; FY11), Real estate
(17.8%; FY11), Cotton Textiles (4.1%; FY11) and SMEs (15.8%; FY11) etc
along with high restructured book (~4.4%; Q1FY12). This remains an
overwhelming concern in the current macro-economic environment.
q We have revised the earnings estimate downward for FY12E and maintain
BUY rating on the stock with TP of Rs.2545 (earlier Rs.2900) based on
SOTP methodology where core business is valued at Rs.1672 (1.8x FY12E
ABV) and subsidiaries are valued at Rs.873 (after giving 20% holding
company discount) as we believe all these concerns are already in the
price.
Overhang on Right Issue continues; SBI needs capital to enhance
its Tier-I capital, which came below 8% at the end of Q4FY11
We believe SBI needs to enhance its Tier-I capital which came below 8% at the end
of Q4FY11, when it provided Rs.79.3 bn on account of shortfall in pension liability
consequent to revision in wages during Ninth Bipartite Settlement. This was charged
to the reserves which shaved off ~Rs.125 /share from its book value.
Management has been indicating about their right issue plan worth Rs.200 bn, implying
GOI has to contribute Rs.120 bn as they hold 59.4% stake in the bank. However,
we are not very optimistic about government giving out so much money after
looking at their fiscal health.
Lower tier-I capital is likely to moderate its balance sheet
growth; we are modeling lower loan growth during FY12E.
We opine that lower tier-I capital (7.6% at the end of Q1FY12) is likely to moderate
its balance sheet growth and hence we are moderating our loan growth assumption
during FY12E. We are assuming ~16% growth in both loan book as well as deposits.
During Q1FY12, we witnessed moderation in its overall business growth - loan book
grew at moderate pace (18.7% YoY) despite strong growth witnessed in agriculture
segment (49.3% YoY); other segments like SME (21.0%) and large corporate
(19.4%) delivered moderate growth. However, retail and international books remained
laggard with only 4.8% and 5.3% growth, respectively.
Our lower loan growth assumption also emanates from our believe that new management
is likely to continue focusing more on margins (i.e. profitable growth)
rather than earlier strategy of growing market share, even if it had come at some
margin sacrifice.
On liability side also, we are likely to witness moderate growth. We believe bank is
sitting on comfortable C/D ratio and hence it is likely to focus more on CASA deposit
mobilization vis-à-vis term deposit growth.
Slippage at elevated levels during last couple of quarters, a key
risk, in our view; large exposure to stressed sectors like Infrastructure,
Textiles, Real estate and SMEs etc along with high restructured
book (~4.4%) remains an overhang in current macroeconomic
environment.
Slippage has remained at the elevated levels during last couple of quarters (average
run rate of 2.9% annualized during last 5 quarters), a key risk, in our view. Even
during Q1FY12, it came at 3.2% (Rs.61.8 bn), much higher by any standards.
Moreover, street is also concern about its huge exposure to stressed sectors like Infrastructure
(17.9%; FY11), Real estate (17.8%; FY11), Cotton Textiles (4.1%; FY11)
and SMEs (15.8%; FY11) etc along with high restructured book (~4.4%; Q1FY12).
This remains an overwhelming concern in the current macro-economic environment.
In percentage terms, its gross NPA and net NPA stand at 3.52% and 1.61%, respectively,
at the end of Q1FY12. Its PCR (provision coverage ratio) including AUCA
stands at 67.25% at the end of Q1FY12. The bank has provided Rs.5.5 bn during
Q1FY12 to meet the counter cyclical buffer deficit (equal amount need to be provided
during Q2FY12).
Valuation & Recommendation
We have revised the earnings estimate downward for FY12E and now expect net
profit of Rs.101.1 bn. This would translate into EPS of Rs.159.1 and adjusted book
value of Rs.929.0 for FY12.
At the CMP of Rs.1889, stock is trading at 1.1x its FY12E adjusted book value and
6.4x its FY12E earnings, after stripping the value of its subsidiaries. We believe, earnings
during Q2FY12 are likely to remain subdued on back of higher NPA provisions
as well as additional provision (Rs.5.5 bn as a counter cyclical buffer) to meet the
regulatory requirement.
We believe all these concerns are already in the price and hence recommend BUY
rating on the stock with TP of Rs.2545 (earlier Rs.2900) based on SOTP methodology
where core business is valued at Rs.1672 (1.8x FY12E ABV) and subsidiaries are valued
at Rs.873 (after giving 20% holding company discount).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
STATE BANK OF INDIA (SBI)
PRICE: RS.1889 RECOMMENDATION: BUY
TARGET PRICE: RS.2545 FY12E P/E: 11.9X; P/ABV: 2.0X
Concerns of right issue getting through, elevated slippage during last few
quarters or slower loan growth etc are already in the price after recent
correction (~25% in last 2 months), in our view; recommend BUY on the
stock as valuation (1.1x after stripping value for subsidiaries) is reasonable
at current level.
q We believe SBI needs to enhance its Tier-I capital which came below 8%
at the end of Q4FY11, when it provided Rs.79.3 bn on account of shortfall
in pension liability; this was charged to the reserves which shaved
off ~Rs.125 /share from its BV. We are not very optimistic about GOI contributing
money to the tune of Rs.120bn after looking at their fiscal
health.
q We opine that lower tier-I capital (7.6% at the end of Q1FY12) is likely to
moderate its balance sheet growth and hence we are moderating our
loan growth assumption during FY12E. We are assuming ~16% growth
in both loan book as well as deposits. Our lower loan growth assumption
also emanates from our believe that new management is likely to
continue focusing more on margins (i.e. profitable growth) rather than
earlier strategy of growing market share, even if it had come at some
margin sacrifice.
q Slippage has remained at the elevated levels during last couple of quarters
(average run rate of 2.9% annualized during last 5 quarters), a key
risk, in our view. Moreover, street is also concern about its huge exposure
to stressed sectors like Infrastructure (17.9%; FY11), Real estate
(17.8%; FY11), Cotton Textiles (4.1%; FY11) and SMEs (15.8%; FY11) etc
along with high restructured book (~4.4%; Q1FY12). This remains an
overwhelming concern in the current macro-economic environment.
q We have revised the earnings estimate downward for FY12E and maintain
BUY rating on the stock with TP of Rs.2545 (earlier Rs.2900) based on
SOTP methodology where core business is valued at Rs.1672 (1.8x FY12E
ABV) and subsidiaries are valued at Rs.873 (after giving 20% holding
company discount) as we believe all these concerns are already in the
price.
Overhang on Right Issue continues; SBI needs capital to enhance
its Tier-I capital, which came below 8% at the end of Q4FY11
We believe SBI needs to enhance its Tier-I capital which came below 8% at the end
of Q4FY11, when it provided Rs.79.3 bn on account of shortfall in pension liability
consequent to revision in wages during Ninth Bipartite Settlement. This was charged
to the reserves which shaved off ~Rs.125 /share from its book value.
Management has been indicating about their right issue plan worth Rs.200 bn, implying
GOI has to contribute Rs.120 bn as they hold 59.4% stake in the bank. However,
we are not very optimistic about government giving out so much money after
looking at their fiscal health.
Lower tier-I capital is likely to moderate its balance sheet
growth; we are modeling lower loan growth during FY12E.
We opine that lower tier-I capital (7.6% at the end of Q1FY12) is likely to moderate
its balance sheet growth and hence we are moderating our loan growth assumption
during FY12E. We are assuming ~16% growth in both loan book as well as deposits.
During Q1FY12, we witnessed moderation in its overall business growth - loan book
grew at moderate pace (18.7% YoY) despite strong growth witnessed in agriculture
segment (49.3% YoY); other segments like SME (21.0%) and large corporate
(19.4%) delivered moderate growth. However, retail and international books remained
laggard with only 4.8% and 5.3% growth, respectively.
Our lower loan growth assumption also emanates from our believe that new management
is likely to continue focusing more on margins (i.e. profitable growth)
rather than earlier strategy of growing market share, even if it had come at some
margin sacrifice.
On liability side also, we are likely to witness moderate growth. We believe bank is
sitting on comfortable C/D ratio and hence it is likely to focus more on CASA deposit
mobilization vis-à-vis term deposit growth.
Slippage at elevated levels during last couple of quarters, a key
risk, in our view; large exposure to stressed sectors like Infrastructure,
Textiles, Real estate and SMEs etc along with high restructured
book (~4.4%) remains an overhang in current macroeconomic
environment.
Slippage has remained at the elevated levels during last couple of quarters (average
run rate of 2.9% annualized during last 5 quarters), a key risk, in our view. Even
during Q1FY12, it came at 3.2% (Rs.61.8 bn), much higher by any standards.
Moreover, street is also concern about its huge exposure to stressed sectors like Infrastructure
(17.9%; FY11), Real estate (17.8%; FY11), Cotton Textiles (4.1%; FY11)
and SMEs (15.8%; FY11) etc along with high restructured book (~4.4%; Q1FY12).
This remains an overwhelming concern in the current macro-economic environment.
In percentage terms, its gross NPA and net NPA stand at 3.52% and 1.61%, respectively,
at the end of Q1FY12. Its PCR (provision coverage ratio) including AUCA
stands at 67.25% at the end of Q1FY12. The bank has provided Rs.5.5 bn during
Q1FY12 to meet the counter cyclical buffer deficit (equal amount need to be provided
during Q2FY12).
Valuation & Recommendation
We have revised the earnings estimate downward for FY12E and now expect net
profit of Rs.101.1 bn. This would translate into EPS of Rs.159.1 and adjusted book
value of Rs.929.0 for FY12.
At the CMP of Rs.1889, stock is trading at 1.1x its FY12E adjusted book value and
6.4x its FY12E earnings, after stripping the value of its subsidiaries. We believe, earnings
during Q2FY12 are likely to remain subdued on back of higher NPA provisions
as well as additional provision (Rs.5.5 bn as a counter cyclical buffer) to meet the
regulatory requirement.
We believe all these concerns are already in the price and hence recommend BUY
rating on the stock with TP of Rs.2545 (earlier Rs.2900) based on SOTP methodology
where core business is valued at Rs.1672 (1.8x FY12E ABV) and subsidiaries are valued
at Rs.873 (after giving 20% holding company discount).
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