Buy SBI - Target Price Rs. 2592 - Dolat Capital

- We believe that SBI should be one of the biggest beneficiaries of improvement in macro environment as concerns regarding the asset quality will recede. Valuations have come-off by around 15% from its recent high and look attractive, given the interest rate cycle reversal and possibility of improvement in GDP growth numbers from next quarter.

- The bank has been witnessing extremely high delinquency ratio which we expect should start trending downwards in FY14E. The bank has one of the lowest restructured loan book amongst PSBs as the bank discouraged restructuring of cases where likelyhood of the business turnaround was minimal. Hence, the slippages were also high compared to peers.

- While the fresh NPL formations are expected to trend downwards, a meaningful decline could still be a couple of quarters away. We believe that as economic growth improves, the bank should be able to improve its NPL recoveries and upgrades which would aid in controlling the high gross NPLs. The stress in large corporate clients is now coming down though the SME clients are still facing stress and remains a key threat to asset quality.

- We expect SBI's credit cist to decline over the next two years supporting the 20% CAGR in net profit during FY13E-15E, as slippage ratio to trend down meaningfully over the next two years. we have a Buy rating on the stock with SOTP based target price of Rs. 2,592. (Valuing the bank at 1.3x on FY14E BVPS + Rs. 612 for value of investments)

Source : Equity Bulls

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