[T.S.R:14633] SBI: Near term headwinds, maintain Underperform

SBI (Rs2,373, Underperform)
Near term headwinds

While SBI is well-positioned for growth in a strong macro environment, near
term headwinds related to low NPA provision coverage, elevated expense
growth, and dilution from planned rights issue would keep earnings under
pressure in FY11. Maintain Underperform as we do not see any near term
catalyst that would take the stock meaningfully higher than our 12-month
target price of Rs2,200 per share.


Near term uncertainties make us cautious: While we expect revenue to grow
20%+ in FY11, EPS growth should only be 8%. With NPA coverage ratio of 59%,
SBI needs to accelerate provisioning to get to the RBI's 70% norm. While
the bank has slowed down branch expansion to 500 from 1,000, it is still
likely to keep expenses high. EPS would also be under pressure due to
dilution resulting from proposed Rs200bn rights issue. We expect earnings
growth to accelerate from FY12 as credit growth continues to be strong.


Can SBI emulate JP Morgan? We benchmarked SBI with JP Morgan Chase (JPM)
and conclude that SBI would be better placed if it further diversifies its
revenue mix, places greater emphasis on growing fee income and focuses on
cross-selling to existing clients. We also believe SBI needs to put in
place specific performance targets — this would help better evaluate
business/management performance. We question the need for SBI to continue
to pay dividends when faced with capital constraints related to rapid
growth.


Valuation unjustified: Valuation at 2.2x FY11E ABV and 1.9x FY12E ABV is
unjustified given near term headwinds to earnings. We value SBI at Rs2,200
per share using DCF, SOTP, and trading multiples. Maintain Underperform as
we see no near term catalyst.



Kindly refer to the note attached below for further details.

(See attached file: SBI-20100621-BRICS-FR-42.pdf)

Regards,
BRICS ResearchDisclaimer:-
The information contained in this communication is intended solely for the use of the individual or entity to whom it is addressed and others authorized to receive it. It may contain confidential or legally privileged information. If you are not the intended recipient you are hereby notified that any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be unlawful. If you have received this communication in error, please notify us immediately by responding to this email and then delete it from your system. Brics Securities Ltd., is neither liable for the proper and complete transmission of the information contained in this communication nor for any delay in its receipt.