Hold Divis Laboratories, SBI: Emkay

- Given a lackluster Q3, the strong no's in Q4 should propel the stock higher especially given the underperformance to similar sized peers in recent past

- We see a near term 7-8% rally as strong Q4 no's come off a weak Q3 as recent underperformance to similarly sized peers. Raise our rating to HOLD from REDUCE

- However beyond the Q4 no's driven rally see limited upside as stock would be valued at 20x FY17 earnings assuming a strong FY15-17 earnings CAGR of 23.5% and margins to sustain at c39%

State Bank of India (SBI)Reco: HOLDCMP: Rs 282Target Price: Rs 308

Asset quality improves, but likely priced in; Hold

- SBI saw lower asset quality deterioration in 4QFY15, as slippages decreased to Rs47.7bn (annualized, 1.5% as compared to 2.3% in 3QFY15). However, fresh restructuring of standard advances was high at Rs11.8bn (annualized, 3.7% of loans)

- Business growth was modest and slower than past, with credit up 7.5% yoy (5.5% qoq) and deposits up 13.1% yoy (4.4% qoq). Stable NIM of 3.2% (flat yoy, up 5bps qoq) and increase in core cost-income (373bps yoy) to 50.2%, resulted in core PPP rising 5.1% yoy (28.4% qoq)

- Capital adequacy of 12% (tier-1 capital of 9.6%) is barely sufficient to meet Basel-3 norms and business growth over FY15-17e.  Given the likely modest profitability ahead (0.8% RoA over FY16-17e), the bank would require capital infusion in CY15

- We have a HOLD rating on the stock, as we expect the bank's focus on prudent growth and improving asset quality to drive modest improvement in the core earnings. While the macro environment could improve over FY16-17, perceptions of default risk persist for the bank until asset quality further improves, restricting a sharp valuation re-rating

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