THE SMART INVESTOR: SBI draws strong value addition from subsidiaries

The current valuation of SBI Cards is pegged way higher than analyst estimates; there is potential in others, too

The current valuation of SBI Cards is pegged way higher than analyst estimates; there is potential in others, too. SHREEPAD S AUTE writes

Corporate banks, which were off investors’ radar for a long time, are likely to regain support following recent developments, such as the progress and precedent in the Essar Steel bankruptcy resolution, and improving asset quality outlook. But in the case of State Bank of India (SBI), there are other triggers, such as the potential of its subsidiaries to create further value for the bank.

The market, too, seems to have started recognising the same if the SBI stock’s outperformance to the Nifty Bank index is anything to go by. SBI had gained nine per cent in a month (till Wednesday; prior to RBI policy), versus 5.4 per cent rise in the Nifty Bank index. And, it has more legs to travel.

According to analysts at Motilal Oswal, “SBI’S subsidiaries have displayed a robust performance over the last few years. The bank plans to monetise its subsidiaries, which would lead to value unlocking for stakeholders.”

SBI’S credit card unit (SBI Cards and Payment Services; or SBI Cards) and life insurance arm (SBI Life Insurance Company) are likely to be key valuation boosters. These two companies contribute a quarter of SBI’S overall valuation based on SOTP (sum of the parts), shows a report by Motilal Oswal.

First, there are expectations of higher valuations for SBI Cards through its proposed IPO (initial public offering), given SBI’S 74 per cent holding in the unit. The valuation of SBI Cards is pegged at ~60,000 crore, according to some estimates, way higher than many analysts’ current estimations. Macquarie, for instance, has valued SBI Cards at ~27,500 crore while Edelweiss has pegged it at ~11,300 crore. At ~60,000 crore of market value, the value unlocking could immediately add around 5 per cent to the target price of SBI’S stock, says Macquarie.

Of late, the country’s largest bank has filed a draft red herring prospectus with the Securities and Exchange Board of India (Sebi) for raising up to ~9,000 crore in the primary market for its cards business. Given the underlying growth opportunities for SBI Cards with supportive macro factors, such as lower penetration of credit cards (less than 5 per cent cards per capita) and high fee income potential, there is little doubt about the upside potential of SBI’S Cards. Also, SBI Cards has reported strong performance in the past in terms of customer acquisition and earnings, and business growth would remain strong given the geographical reach of SBI.

In fact, it would now be interesting to see if SBI Cards follows the footsteps of life insurance arm, the second-largest valued asset in SBI’S valuation. The bank holds a 58 per cent stake in SBI Life. SBI Life’s market value has jumped sharply by 70 per cent in one year and the life insurance arm remains the preferred pick of most analysts in the finance space.

The rising awareness of life insurance as a protection product is giving strong traction to the sector. However, what gives SBI Life an edge is its low operating cost model and extensive distribution. Analysts say these factors would help SBI Life sustain healthy growth in profit and shareholder value. Then there is SBI General Insurance, which has seen good market share gains in the general insurance business and the mutual fund business (SBI Asset Management), which will further push up earnings and valuation.

This apart, the bank itself should see better operating performance with likely improvement in asset quality and an already large provision cover in place. But, a small part of the gains may get offset because of its exposure to some stressed companies, such as Dewan Housing Finance.

Yet, SBI’S current attractive valuation at 1.2 times FY21 estimated book offers good comfort. Also, while 45 of the 52 analysts polled by Bloomberg have a buy on SBI stock (current price ~320) with a target of ~370, there is scope for the target to be revised upwards.