SBI can appreciate by a minimum of 35% in a year

If there is one company that needs to be selected which handled FY 09 in a better way, that should certainly be SBI. The tough competition that the private banks were giving the Public sector banks and in particular to SBI was kept off for a while. SBI 's brand image as a trusted player and a banker has only increased in the financial year FY 09.

Prior to FY 09, the private sector banks and in particular ICICI has been very aggressive in pushing all its offering. Though the loans from these banks were easier to get, the customer had never trusted these banks on account of many one time charges or some new fees creeping into their loans.

But, that was just the price they had to pay for getting an easier home loan in just 10 or 15 days time with minimal documents and processes compared to the lengthy and stringent processes that were carried out by the Public bankers. Moreover, ICICI 's concentration and the aggressiveness shown in pushing unsecured loans like personal loans did not work out for the company. However, we believe that Chanda Kocchar will take the bank in a more conservative path at least for the time being.

ICICI had recorded a decline of 9.2% in advances and 10.3% in deposits in the financial year FY 09. Compare this with the 30% growth in advances and 38% growth in deposits of SBI and this just speaks volumes of how the two banks have been running their businesses. The domestic market share of SBI has grown from 15.20% to 16.03%. The home loans and educational loans witnessed growth rates of 21% and 50%. In a time, when the auto industry was reporting sluggish numbers, SBI witnessed Auto loan growth rates of 36% in FY09.

The company reported net profits of 10,955 crore on a consolidated basis and around 9121 crore on a stand alone basis in the financial year FY 09. With the improvement in economic conditions, we believe the demand for loans is all set to improve going forward. We see a rebound in all the types of banking consumers' demand for loans. We expect that the earnings of the bank post a growth rate of more than 27% in the financial year FY 10. Even the bank has indicated that it is looking at posting a minimum of 11,000 crore in standalone net profits for the current fiscal.

Taking the bank's current dominant position in the market and improving economic outlook, we believe that the bank could comfortably post standalone earnings of around 11,500 crore or an EPS of around 182. The consolidated earnings for the bank is expected to be around 13,o00 crore at the end of current fiscal. Giving a moderate valuation on the standalone earnings of the bank, we expect the bank's price to appreciate by a minimum of 35% from the current levels. This would translate in to around Rs. 2340 per share. The given estimates are very conservative and it is highly likely that the actual earnings and the stock price could be much higher a 1 - year time frame.

Now, tell me. How many of you would buy SBI? 30% or 35% appreciation in a year is by all standards a very good performance. But, i have seen many of the investors going crazy behind stocks wanting 3 or a 4 bagger in just a year. I am not saying that one should not invest in fundamentally backed potential wealth creators or midcap stocks. The point is one should give some room in his/her portfolio to dominant market leaders and index stocks as well.

Note - The above estimates are done taking the AS - IS status of the bank. The potential merger of it's associate banks were not considered.

To contact the equity analyst on this story: Arun Gopalan in Chennai at Arun@hbjcapital.com