We are bullish on the prospects of SBI as we feel that the worst is discounted in current market price and there is room for upside
Akash Jain
Ajcon Global
We believe the Interim Budget was an election budget. As expected the central government resorted to populist measures to win the hearts of rural masses and middle class ahead of general elections. It remains to be seen as to how the government would be able to meet the aggressive targets set in the Budget.
We do expect inflation to go up owing to higher expenditure. With crucial Interim Budget and assembly elections over, all eyes now would shift on global cues, RBIs monetary policy meet and ongoing Q3 earnings season.
Globally, all eyes would be on ongoing tussle between the US and China and cues from the upcoming meeting between the two economic giants. The recent slowdown in China’s economic growth is also a cause of concern for global investors. Clarity on Brexit would also act as a key trigger for investor interest.
We believe the Indian equity markets are in a structural bull run as the benefits of implementation of GST, Insolvency and Bankruptcy Code, digitisation, thrust on Make in India and improving relations with key foreign countries would augur well for the economy in the long run.
The strategy at present should be to invest in a phased manner only in companies that are not connected to any political party, have a robust business model, strong earnings and cash-flow visibility, low debt and backed by quality management especially on the corporate governance front.
Considering the above factors, investors can have a stock specific approach in midcaps and smallcaps as there are many companies that are trading at a discount of 50-70 percent to their peak price in early 2018.
On a safer side, we would suggest investors to have a look at consumption stocks, top quality NBFCs having strong parentage, auto and auto ancillary stocks, PSU banks that even after recent rally are trading at depressed valuations (looking better after the cleanup of NPA mess, progress made under the NPA resolution framework under IBC, faster resolutions under NCLT and proposed recapitalization), IT and private insurance companies at the current moment.
State Bank of India | CMP: Rs 284 | Market Cap: Rs 2,53,726 crore
We believe the bank is well placed now after its performance in the last few quarters. We are happy with SBIs Q3 result and the management has delivered what it had promised in previous quarters. We believe the bank is well on track to return to its past glories after witnessing strong execution led by its strong management.
The bank registered strong NII growth of 21.4 percent YoY led by robust credit growth, lower slippages and lower funding cost. Net profit came in at Rs 3,955 crore due to domestic credit growth of 15.65 percent YoY, better NIMs due to higher yields on advances.
While the cost of funds is flat, there has been improvement in slippage ratio by 459 bps YoY, significant improvement in credit cost by 105 bps YoY and write-back of MTM due to softening of bond yields. RoA has improved to 0.45 percent in Q3FY19 as against 0.11 percent in Q2FY19 on QoQ basis.
In addition, there has been sustained improvement in asset quality. The stress from power sector has been mostly recognised by the bank. The much talked about exposure to IL&FS has been taken care of. As per the bank, the DHFL account is fully secured and is a good rated standard asset.
After the recent liquidity crisis in NBFC space, the bank has targeted NBFCs backed by government and PSU and high-quality private sector NBFCs.
We believe that SBI is well on track to achieve its earlier guidance of loan CAGR of 12 percent, NIM target of 3 percent, slippages and credit cost of less than 2 percent, ROA of 0.9-1 percent, cost/income of 46 percent by end of FY20. The management of the bank is confident that it is progressing well to meet slippage ratio and credit cost guidance for FY19E and FY20E.
To unlock value from its subsidiaries, SBI General Insurance and SBI Funds and Cards management are expected to be listed next year.
We are bullish on the prospects of SBI as we feel that the worst is discounted in current market price and there is room for upside.
At the current market price of Rs 284, the bank trades at P/BV of 1.30x (9MFY19 book value stands at Rs 218) and at adjusted book value of Rs 127 (after deducting Net NPAs), the stock trades at P/BV of 2.24x. We are bullish on the stock and advice accumulation as CMP is quite reasonable.
The author is Vice President - Equity Research at Ajcon Global Services.
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