Accumulate Bank of Baroda - Target Price Rs. 780 - Dolat Capital

- Our stance on BOB is structurally positive, however it may not see a major outperformance relative to the sector, owing to concerns on asset quality for the next couple of quarters.

- We believe that despite the rise in fresh NPL formations, BOB's delinquency ratio should remain one of the lowest amongst PSBs. However, till the time signs of stability in asset quality are visible, the stock is unlikely poised for a major re-rating.

- Despite the lending rate cuts, we are in line with the management guidence that the pressure on NIM shall be contained as significant amount of high cost bulk deposit are due for re-pricing in the current and next quarter. The proportion of high cost deposit is likely to come down from 12% in Dec'12 to 7.5% by March'13. The bank is confident of maintaining the domestic NIM at 3% (3.08% in Dec'12).

- BOB's Tier 1 of 9.3% (Dec'12) is one of the best among PSBs and should support the bank's 20% balance sheet growth during the next 2 years. ROEs which shows a significant dip in FY13E should stabilize and improve to 17.5%+ by FY15E, in our view.

- Current valuations are at almost 10% discount to its average long term valuations over the past 8 years. Rate cuts and signs of economic recovery can help the stock revert back to its average, but a sustainable re rating could take time till asset quality concerns start to abate. We have an Accumulate rating on the stock with target price of Rs. 780 based on PBR of 0.9x on FY14E BVPS forecasts.

Source : Equity Bulls

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