Buy State Bank of India; target of Rs 340: ICICI Direct

ICICI Direct's research report on State Bank of India

State Bank of India (SBI) yesterday informed exchanges that its subsidiary SBI Life Insurance Company has filed a draft red hearing prospectus with Sebi for an IPO.  It will be an offer for sale of up  to 12 crore shares  representing 12% of total paid up capital of SBI Life  that is  a  joint venture  between SBI and BNP Paribas Cardiff . SBI would sell 8 crore shares (or 8% stake) while BNP Paribas would sell 4 crore shares (or 4% stake). SBI holds 70.1% stake in SBI Life while BNP Paribas holds a 26% stake.  The balance stake is held by affiliates of KKR Asian Fund L P (1.9% stake) and Temasek Holdings (Pvt) Ltd (1.9% stake). In December 2016, the bank sold a 3.9% stake to these two entities for Rs 1794 crore, valuing SBI Life at Rs 46000 crore then.

Outlook
The merger with associate banks has resulted in muted profits and huge NPA s tress for SBI. With fresh issuance of merger shares and factoring the new QIP shares, our revised merged bank adjusted book value for FY19E is at Rs 184. Valuing the same at 1.5x ABV, we arrive at a bank valuation of Rs 277 per share. Factoring in increased value of SBI Life, we value subsidiaries at Rs 63 and arrive at a target price of Rs 340 Rs 335 earlier). Strategic stake in non - core investments like NSE (5.19%), BSE (4.75%), NSDL, ARCIL, UTI AMC, etc, may add further value not factored in by us. We reiterate our BUY recommendation on SBI.

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