Sustenance of SBI rally to hinge on earnings growth
On Thursday, the stock hit a fresh lifetime high of ~793.5 per share
Shares of India’s largest public sector lender, State Bank of India (SBI), have seen a one-way rally over the past few weeks. Since February 4, the day the lender announced its Octoberdecember quarter (Q3) results for the current financial year 2023–24 (FY24), the shares have rallied 22 per cent at the bourses compared to a 2.8 per cent rise in the benchmark S&P BSE Sensex.
On Thursday, the stock hit a fresh lifetime high of ~793.5 per share, with the market capitalisation reaching ~7.06 trillion intraday. It crossed the ~7 trillion mark for the first time on Tuesday.
Analysts attribute the stock’s recent outperformance to consistent earnings growth driven by asset quality improvement, lower slippages, higher recoveries, and some write-offs.
SBI reported a net profit of ~9,164 crore in Q3FY24, down 35.5 per cent year-on-year (Y-O-Y) and 36 per cent quarteron-quarter (Q-O-Q).
While net interest margin (NIM) declined to 3.34 per cent during this period, the bank’s gross non-performing asset (NPA) ratio and net NPA ratio improved by 72 basis points (bps) and 13 bps Y-O-Y, respectively.
Looking ahead, analysts believe the stock will remain on a gradual uptrend, catching up with the rally in other public sector stocks that have surged up to 119 per cent over the past six months. Within these, public sector banks (PSBS) have soared up to 102 per cent during the period.
By comparison, SBI advanced 36 per cent in six months, the Sensex 12 per cent, and the S&P BSE Bankex 8.2 per cent.
However, the strength of the rally in the months ahead will be a function of earnings growth, they said.
“The rally in the stock, thus far, was on the back of valuation rerating in PSBS. The gap, however, has been bridged over the past one to two years. We believe most of the rerating is done, and the move, here on out, will depend on the bank’s financial performance Q-O-Q,” said Narendra Solanki, head of fundamental research at Anand Rathi Shares and Stock Brokers.
The management aims to achieve 15 per cent loan growth in the next financial year (2024-25, or FY25) on the back of a strong macroeconomic environment.
Loan growth stood at 13 per cent in Q3FY24.
“Retail loans are expected to continue a healthy growth momentum in FY25, while the small and medium-sized enterprise segment is likely to outperform other segments. Besides, the capital expenditure momentum has started picking up, aiding wholesale growth in FY25,” the management said at the JM Financial India Conference (Singapore) 2024.
On the margin front, SBI expects NIMS to remain stable around current levels, with no further deposit rate hike likely going forward.
“We expect SBI to deliver steady performance, adjusting for various one-offs. Loan growth is likely to be lower than the industry average, while NIM is expected to stay elevated as it is the primary revenue source,” said analysts at Kotak Institutional Equities.
The brokerage maintains a ‘buy’ rating on the stock as the bank has withstood most concerns, with negligible impact on earnings.
“We do not see a specific tailwind that can cause a rerating in the short term, but we see headroom for outperformance over other public and private banks,” it added.
The brokerage has a target price of ~850 for SBI, valuing the stock at 1.4x book and 10x earnings for return on earnings at 15 per cent.
Against this, analysts suggest adding SBI’S stock on a dip from a long-term perspective. The counter, according to Santosh Meena, head of research, Swastika Investmart (near-term target: ~880; 12month: ~1,100), witnessed a remarkable surge from ~30 to ~300 during the 2003–2007 bull-market phase, following a decade of consolidation.
“After a decade of consolidation, the recent breakout above the ~300 level in 2021 suggests the potential for a significant upward movement. During its peak valuation in the previous bull run, SBI traded at a price-tobook value ratio of 3.5x, compared to its current valuation of less than 2x, indicating considerable upside potential,” Meena said.