Financial Daily from THE HINDU group of publications
Sunday, Jul 25, 2004
Financial Daily from THE HINDU group of publications Sunday, Jul 25, 2004 |
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Investment World
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Stocks Markets - Recommendation Money & Banking - Stocks State Bank of India: Buy
AN investment can be considered in the stock of State Bank of India. The stock now trades at a price below its book value based on the consolidated balance sheet. The price-to-earnings multiple of the stock is also below 5, based on the consolidated earnings per share. SBI does have a number of constraints in its main banking business. Its size itself is a major negative factor — the bank is about three times larger than its nearest competitor. The size factor has led to a lower growth rate in the bank's business over the past few years. The spread (difference between rate at which money is borrowed and lent/invested) of SBI is lower than a number of competitors. The proportion of expenses to operating income is also high. The bank, however, has a number of advantages. By virtue of its size, its ability to stay in the business for a considerably longer period is assured. It can explore growth opportunities outside the Indian sub-continent, too. The size can also be leveraged to grow its other businesses — notably credit cards, insurance, mutual funds, and as a primary dealer. This could compensate for the constraints to growth in the banking business. This has been in evidence over the past two years. The non-banking business of SBI has been growing at a much faster pace than its banking business. The banking business is also now in better shape than ever before. SBI has been able to reduce the proportion of bad loans in its portfolio of advances. It still has a sizeable amount of unrealised gains. This, coupled with the rising proportion of high-yielding retail advances, holds the potential to ensure that decline in spreads do not drag profit growth in its banking business. These factors make the valuation of the stock attractive.
BL Research Bureau
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