Brokerage Recommends 'Buy' This PSU Banking Stock With Target Price Of Rs 600, Sees 19% Gains

Motilal Oswal Has recently published a report of State Bank Of India where the brokerage suggested 'buy' the stocks of the company at a target price of Rs 600 apiece. SBI continues to strengthen its Balance Sheet and improve return ratios. The focus remains on building a superior loan book while maintaining strong underwriting as evident in lower stressed assets and higher PCR. This has aided in a sustained turnaround in operating performance and will drive return ratios to the long-term average and possibly higher.

Stock Outlook & Performance

SBI yesterday closed at Rs 666.10 apiece, today it opened at Rs 501 apiece. The stock's Current market Price (CMP) is Rs 507.80 apiece, gained 1.98% from the previous close. Its CMP is trading at Rs 106.55 above the 52-week low levels of Rs 401.25 recorded on 23 August 2021. Its CMP is trading at Rs 41.2 below the 52-week high of Rs 378.70 per share recorded on 07 February 2022.

The ROE of the stock is 12.53%. Its PE ratio is 12.54, while the sector PE ratio is 11.12. The PB ratio is 1.55. TTM EPS is Rs 40.52. The dividend yield is 1.40. It's a large-cap banking stock with a market capitalization of Rs 453,924 crore.

Its share price gained 2.68% in the past 1 week, and in the past 1 month, its share gained 12.91%, respectively. Over the past 3 years and 5 years, its share price gained 39.87% and 69.78%, respectively.

Considering the estimated target price of Rs 600 apiece and the CMP of the stock, the stock sees a potential upside of Rs 19%.

Gaining market share in loans; improving utilization lends further confidence

Over the last few years, the bank is gradually gaining market share in loans. While PSU Banks, in aggregate, lost 1,130bp in market share in loans over the last four years, SBI is an outlier with a 90bp gain to 23%. Utilization levels improved by ~860bp to 31% in the Wholesale book, while Retail growth remains steady at ~15% YoY in FY22. Within Retail loans, Xpress Credit is the fastest growing segment and offers a long runway of growth. While we estimate loan growth to sustain at 13% CAGR over FY22-24, we are reasonably confident of SBIN growing ahead of the market, further improving its loan market share.

Robust liability franchise and low C/D ratio puts SBI in an enviable state

Deposits grew 10% YoY to Rs 40.5t in FY22. SBIN remains an unbeatable deposit machine, with a deposit market share of 24.6%. The bank has gained 170bp in market share in deposits over the last four years. With a steady CASA ratio of ~45% in FY22, the cost of deposits (reported) has moderated to 3.8% in FY22 from 5.1% in FY19. As interest rates rise, we expect the bank to pass on some benefits to deposit holders and estimate cost of deposits at 4.2% in FY24. In addition, the C/D ratio, at 67.5% (peak of 86% over the past decade), is significantly lower than top private peers and system C/D ratio of ~72%. The domestic C/D ratio of the bank stands even lower at 66.7% as of FY22. The combination of these two factors will limit the increase in funding cost and hold the bank in good stead in a rising interest rate environment.

Bank to drive incremental value v/s subsidiaries, thereby gaining share in SoTP valuation

Over the past few years, increasing customer awareness about various financial products has enabled SBIN's subsidiaries to continuously gain scale, thus helping them emerge as market leaders in their respective segments. As a result, market multiples witnessed a strong expansion and the contribution of subsidiaries to overall SoTP rose to 40% at the peak from 17% five years ago. At present, SoTP contributes 33% to our Target Price. We believe the incremental value will be driven by core banking operations as the bank continues to deliver robust earnings CAGR (28% over FY22-24E), thus enabling it to achieve a RoE of 16.7% by FY24E. The performance of its subsidiaries has been under pressure owing to a challenging macro-environment.

Best-in-class SMA, positions SBI well for the volatile macro environment

Controlled slippages (1%) and negligible SMA book (13bp) place SBI in an enviable position and allows the bank to handle macro challenges with greater ease. The management's continuous focus on improving underwriting capabilities has begun to yield results and is reflected in resilient asset quality. GNPA/NNPA ratio declined to 4%/1% in FY22, while PCR increased to 75% (93% on the Corporate book). Higher provisions on stressed accounts (100% on SREI and Future Group) place SBIN well, while a high AUCA book at Rs 1.73t, with recoveries in the 4-11% range, will limit overall provisions.

The brokerage said, "We estimate GNPA/NNPA to moderate to 2.9%/0.5% by FY24. RoE to easily surpass the 15% threshold; expect 16.7% by FY24 SBIN reported a RoE of 13.9% in FY22 - the highest since AQR commenced in FY16. From FY17 to FY19, it navigated through the difficult phase of corporate asset quality, which impacted profitability and return ratios. We believe the bulk of the corporate pain is over. It has adequate provisions on this portfolio (93% PCR in Corporate) and appears well-positioned to surpass the long-term trend of 15% RoE in FY23."

RoE to easily surpass the 15% threshold; expect 16.7% by FY24

SBI reported a RoE of 13.9% in FY22 - the highest since AQR commenced in FY16. From FY17 to FY19, it navigated through the difficult phase of corporate asset quality, which impacted profitability and return ratios. We believe the bulk of the corporate pain is over. It has adequate provisions on this portfolio (93% PCR in Corporate) and appears well-positioned to surpass the long-term trend of 15% RoE in FY23.

Valuation and View

According to Motilal Oswal, SBI has delivered a strong performance, amid a challenging macro-environment, led by steady business and revenue growth and controlled provisions. The management expects the momentum to remain healthy as utilization levels improve, while Retail growth is likely to remain steady. A higher mix of floating loans and CASA mix will support margin in a rising interest rate environment. Asset quality performance has been strong, and the outlook remains healthy, with a low restructured book and SMA pool.

Motilal Oswal said, "We estimate credit cost to be controlled at 1% in FY24, enabling 28% earnings CAGR over FY22-24. We expect SBI to deliver a RoA/RoE of 0.9%/16.7% in FY24. SBI remains our top Buy in the sector, with a Target Price of Rs 600 (1.2x FY24E ABV + Rs 195 from its subsidiaries)."

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.