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With an expectation of 50% upside, here's why SBI is 'top pick' of analysts

Most of the global brokerages see deep value in the stock at current levels. The most aggressive target price of Rs 310 is put out by CLSA which translates into a 50 percent upside current levels.

August 28, 2020 / 09:52 PM IST
 
 
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India’s largest public sector bank, SBI is back on analysts’ radar despite Moody’s warning on asset quality. The stock has rallied by about 10 percent so far in the month of August after recent upgrades by top global brokerage firms.

Other than Moody's, which downgraded SBI's standalone profile to ba2 from ba1 citing deteriorating asset quality and profitability, most of the global brokerage firms see deep value in the SBI stock at current levels.

The most aggressive target price of Rs 310 has been put out by CLSA which translated into an upside of nearly 50 percent from Thursday’s closing of Rs 209.

CLSA in its August 20 note highlighted five reasons why SBI is a deep value stock. "SBI presents a deep value opportunity, in our view, as the bank is relatively better positioned on asset quality post-COVID-19, driven by high government/PSU share in loan book," said the CLSA note.

"We are more comfortable on SBI’s asset quality/disclosures and hence increase our SOTP-based target price from Rs270 to Rs310, valuing core bank at 0.7x Jun-22 book and Rs131/share of sub value," the report added.

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CLSA in the note specified that the stock is best positioned in terms of COVID-19 asset quality hit; it has gained market share; Yes Bank bailout was structured; it has best in class subsidiaries; and compelling valuations.

Most global brokerage firms say that the valuations look reasonable and the stock is trading at the attractive entry point. Goldman Sachs in its recent note on August 24 raised EPS estimates for SBI and target price to Rs 282 which translates into an upside of 35 percent from Thursday’s closing price of Rs 209. It upgraded the stock to buy from neutral.

“Current valuation (0.2x FY21E BVPS) makes for an attractive entry point as (1) Yes Bank’s tail risk is likely under control post the recent capital raising and stabilising deposit base, (2) better balance sheet and PPOP management done by SBI in this cycle, (3) steep valuation discount to ICICI Bank/Axis Bank despite much better balance sheet management,” the note added.

State Bank of India (SBI) is the oldest and the largest bank in India with more than 21,000 branches spread across the country. It has a loan book of Rs 23 trillion and deposit base of Rs 34.2 trillion, as on Q1 FY21.

The country's biggest lender State Bank of India on July 31 reported a standalone profit of Rs 4,189.34 crore for the quarter ended June 2020, a growth of 81.2 percent over the year-ago period driven by stake sale in the life insurance business, but the provisions and lower non-interest income limited growth.

SBI said its provisions only for non-performing assets at Rs 9,420.46 crore declined sequentially (down 20.8 percent) as well as year-on-year (down 19.1 percent) for the quarter ended June 2020.

SBI indicated that lending is reverting to normal levels and it has witnessed higher growth since Jun’20, with rural demand remaining resilient.

On August 27, global investment bank UBS upgraded the stock to buy from sell with a target price of Rs 260. The global investment bank is of the view that the stock is trading below the five-year average.

“Recent regulatory guidelines on restructuring and current account operations are positive for SBI. SBI is well capitalised compared with peer SOE banks; it has a provisioning coverage ratio (PCR) of 86.3% as of June 2020,” said the report.

It further added that loans under moratorium (9.5% of total term loans as of June 2020) will likely drive the magnitude of SBI’s restructuring. “We believe the current valuation is inexpensive and could fuel a rerating. We, therefore, upgrade the stock from Sell to Buy,” UBS said.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Kshitij Anand is the Editor Markets at Moneycontrol.
first published: Aug 28, 2020 01:06 pm

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