This Large Cap PSU Stock Is Brokerage's Top Pick Among PSUs, Suggest Buy For 30% Gains

A report published by Sharekhan has recently on SBI, India's largest Public Sector Bank, where the brokerage suggested investors buy the stock for a target price of Rs 600/share.

Stock Performance

On June 28, 2022, SBI closed at Rs 464.25/share after gaining 0.77% from the previous close of Rs 461.20/share, it was opened at Rs 458.90. The closing price of the stock is Rs 63 above the 52-week low of Rs 401.25/share level. The 52 week high is Rs 549/share.

Sharekhan has estimated a target price of Rs 600/share. Considering the Target price and the current market price of the stock, investors can expect a potential gain of 30 % in 12 months.

The stock has performed well in terms of return on investment over the last 5 years. However, in the past 1-3 months it witnessed down movement in its price. 1.19% in 1 month and 6.86% in 3 months, respectively. In the past 1 week, it has moved up 2.8%. In 1 past 1 year, it gave a positive return of 8.58%, 28.26% in 3 years, and 67.64% in 5 years, respectively.

Brokerage Views & Interaction With the Management

The brokerage stated, "The bank has guided to keep credit costs well below ~1%. Wholesale corporate book has already started to see some green shoots in the past quarter led by a sharp rebound in economic activity. The bank believes that as loss given default probability is higher in wholesale corporate book, the focus is to maintain strong underwriting. Now, 89% of corporate book is being rated in investment grade which is a key positive. On the margin front, bank believes that higher mix of floating loans, improving CD ratio and higher CASA will support margin in a rising interest rate environment. Bank guided that it would continue to invest in constant digital innovation and capabilities. The bank also introduced two new end-to-end digital loans product - pre-approved two-wheeler and business loans, which are doing well."

Higher provision buffers and improvement in underwriting to keep credit cost lower

The bank has strengthened its balance Sheet by creating higher provisions on stressed accounts. Bank's continued focus on improving underwriting has manifested in controlled slippages ~1% in FY22 and negligible SMA book ~13bps. NNPA ratio thus dropped to 1% (a historical low) in FY22 while PCR increased to 75% (85% on corporate book). Higher provisions on stressed accounts (100% on SREI and Future Group) places it well, while higher recoveries from AUCA book would limit the overall provisioning requirement.

The management has guided towards a run-rate of Rs. 8,000-10,000 crore of recoveries from written-off accounts in FY23E. Restructured loans (on account of COVID-19) stood at 1.1% of loans. Additionally, the bank has another ~0.25% of loans of other restructured advances not related to COVID-19 restructuring. However, the bank carries additional non-NPA provisions of Rs. 30,629 crores (~110 bps of net advances).

The bank is seeing healthy repayment trends in restructured book and does not expect borrowers especially in SME and retail to avail the full moratorium. ECLGS loans stand at 1.2% of the total book and this book has seen less than 2% slippages thus far. The Security Receipts (SR) book now stands at Rs 7,860 crores in FY22. Bank maintains 100% provisions against the SR book which is a key positive. GNPLs in retail segment are best in class in industry. Now, 89% of corporate book is being rated in investment grade which is also key positive.

Risk Weighted Assets (RWA) to total assets is less than 50%, which indicates strong book quality. Further, the bank's exposures to the power/telecom sectors remained comfortable, with the bulk of the exposure towards PSU entities and better rated corporates. Granularity and profile of borrowers has significantly improved. This all in turn should prevent deterioration in asset quality and would lower credit cost in FY2023E/FY2024E.

Sharekhan suggests buy, Remains Top Pic Among PSUs

At CMP, SBI trades at 1.0x and 0.9x its FY2023E/24E Core ABV. In FY23E, there could be volatility in earnings due to MTM losses from AFS book (available for sale) in near term, however with improving asset quality, a higher PCR, higher capital levels and high rated loans in corporate segment augurs well for bank in future and bank is well-positioned to gain market share on the business front. Its deposit franchise, better performance from subsidiaries, and a low risk of dilution (as compared to PSU bank peers) are likely to favor the business. Hence, we maintain a Buy rating on SBI with an unchanged PT of Rs. 600. SBI remains our top pick among PSUs.

According to the brokerage, the key risk would be for their buy call would be Economic slowdown due to which slower loan growth and higher than anticipated credit cost especially from corporate and SME book could affect earnings.

About the Company - State Bank of India (SBI)

SBI is a Public Sector bank. It is an Indian Multinational, Public Sector banking and financial services statutory body headquartered in Mumbai. It is the largest and oldest bank in India with over 200 years of history.

SBI, the largest Indian Bank with 1/4th market share, serves over 45 crore customers through its vast network of over 22,000 branches, 62617 ATMs/ADWMs, and 71,968 BC outlets, with an undeterred focus on innovation, customer-centricity, which stems from the core values of the Bank - Service, Transparency, Ethics, Politeness and Sustainability.

The Bank has successfully diversified businesses through its various subsidiaries i.e SBI General Insurance, SBI Life Insurance, SBI Mutual Fund, SBI Card, etc. It has spread its presence globally and operates across time zones through 229 offices in 31 foreign countries.

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. 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.