• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

FRESH investments in the stock of State Bank of India can be considered. The stock is trading below its book value, if we consider the consolidated balance sheet. The valuation is thus appealing and can deliver attractive returns for investors with a long-term perspective.

The outlook for public sector banks for the next 12 months has weakened slightly. Though the prospects for continued strong growth in credit offtake augurs well, increased volumes may, however, be accompanied by a squeeze on margins. This could bring down the profit growth. From a valuation perspective, SBI's size too has not been an advantage. It has one of the lowest yields on advances in the industry and the proportion of investment in government securities is one of the highest. This too could exert pressure on profit growth from banking operations.

Despite the outlook for such modest profit growth, the valuation is, however, still attractive. This is because a price to earnings multiple of less than seven or a price to book of less than one does not require profit growth of more than 10 per cent, which appears achievable. Dividends declared by SBI is also growing at more than 10 per cent though the dividend yield itself is not attractive at less than 2 per cent.

The stock price also does not factor in the value of the faster growing subsidiaries of SBI. SBI's ventures in segments such as Mutual Funds, Life Insurance and Credit Cards are doing well. In addition, the associate banks such as State Bank of Bikaner, State Bank of Travancore and State Bank of Mysore are doing better than SBI.

In contrast, the stock prices of private sector behemoths such as ICICI Bank and HDFC Bank factor in the value of their fast growing subsidiaries. However, there is a caveat. It may take a longer time for the value of SBI's subsidiaries to be reflected in the stock price. Investors may thus need to enter the stock with a long-term perspective.

Suresh Krishnamurthy

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Ambuja Cement Eastern: Reject

Copyright © 2005, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line