CMP = Rs 1,525 (as of Friday)
Price target: Rs 1,780
Key points
- The Reserve Bank of India (RBI) has announced that it is going to transfer its 59.7% holding in State Bank of India (SBI) to the government for Rs 35,530 crore on June 29, 2007.
- The transaction is revenue neutral for the government, as the RBI would declare a special dividend of a similar amount to replace the amount paid by the government for the stake sale.
- The SBI management has said that the bank will require to raise Rs 15,000 crore of capital in FY2008; of this Rs 6,000 crore is likely to be in the form of equity and the balance as debt.
- The current guidelines restrict SBI from diluting the promoter's stake below 55% and this would hinder the bank's capital raising plans. Hence the management is of the view that the follow-on offer would take place after the amendment to the SBI Act, most probably in December 2007.
- SBI has plans to consolidate its insurance and asset management businesses into a separate non-banking financial company (NBFC). It also plans to sell a 10% stake in the NBFC to three to four investors and intends to list the arm in FY2009. All these would be significant value drivers going forward.
- The chairman of the bank has stated that he expects the valuation of the life insurance business to be around Rs 28,700 crore ($7 billion) while we have valued the same business at Rs 23,800 crore ($5.8 billion).
- Its valuation is lower considering the roadblocks that the bank is likely to face while unlocking the value in these investments, just as ICICI Bank is facing now.
- After providing for the AS-15 impact (Rs 900 crore of extra provision per year from FY2008-12) our earnings estimates for FY2008 and FY2009 have reduced by 4% each. We have also introduced our FY2009 estimates.
- Based on the current market price of Rs 1,525 the stock is currently trading at 13.9x FY2009E earnings per share (EPS), 1.9x FY2009E stand-alone book value of Rs 813 and 1.4x FY2009E consolidated book value of Rs 1,061. The stock has run up 54% in a span of the past three months.
- Hence in the near term there could be some profit booking and consolidation. However, I believe the bank has entered a sweet spot as a host of policy changes in the banking sector and for SBI could unlock significant value in the stock in the medium term.
- I maintain Buy recommendation on the stock with a revised twelve-month price target of Rs 1,780.
