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S Muralidhar
NEW DELHI, Aug 27: The success of the Resurgent India Bonds is yet to filter down to the State Bank of India counter on the bourses. The scrip continues to trade around its 32-month low leaving a wide margin for bargain hunters.
For the country's largest bank, the $ 4.16 billion inflow from the RIBs is a bonanza not just for the bank and the country, it means fresh opportunitites for investors as the scrip's valuation has taken a dramatic turn in the past few days. Even on a conservative estimate, the deployment of the RIB funds would mean an additional net profit of around Rs 100 crore for SBI in the current financial year. This would translate into an additional earning per share of Rs 1.91.
Based on the additional EPS of Rs 1.91 alone, the scrip should see a rise of Rs 11 to 12 going by its current price earning multiple of 5.2. Besides, the sharpslide in the scrip over the last few months makes the scrip all-the-more attractive. During April this year, the scrip had peaked at Rs 305 when the sensex crossed the 4000-mark. With the sensex struggling to cross the 3000-level, SBI is hovering around Rs 186-190. Or, a loss of around 40 per cent over the last four months. Over the last one month, the SBI counter has shed 18-20 per cent falling from Rs 230 when the sensex was around 3,400.
Though the funds from the RIB are meant for investments in infrastructure projects, the entire proceeds (around Rs 17,000 crore) will not be deployed in this segment immediately. Over the next six months, till the projects are tied up, SBI will be investing a substantial portion of these funds in government securities which yield a return of 11 to 13 per cent depending on the tenure. The interest rate spread could be anywhere between two to three per cent. Assuming that the spread would be two per cent, an investment of Rs 10,000 crore could mean a profit of Rs 200 crore for full year or Rs 100 crore for six months. Besides, the quality of earnings assumes importance.
These investments carry the zero-NPA tag as against loans to the corporate sector. While SBI's profit over the medium-term to long-term will depend on the quality of loans extended to the infrastructure sector, in the current financial year it will mean a big boost to the bank's earnings. Earnings driven by the RIB in the current fiscal will help the bank control the slide in its margins. The net interest spread of the bank has come down from four per cent in 1996-97 to 3.57 per cent in 1997-98. During 1997-98 overhead expenses increased by 15.6 per cent, while the total net income grew by 2.7 per cent. As a result the cost-to-income ration was a whopping 57.39 per cent, which should be around 50 per cent. SBI has undertaken an exercise to cut costs, especially overhead expenses.
The fall in the SBI stock is more to do with the general sentiment in the market. Last year's net profit grew by 38 per cent to Rs 1861 crore (EPS of Rs 35.53 besides a dividend of Rs 4 per share). During the first quarter of the current fiscal, SBI's net profit grew by 33 per cent to Rs 426.6 crore. For a bank whose growth is driven by size and volumes (assets are Rs 1,79,672 crore and deposits Rs 1,31,091 crore with 8,925 branches in India and 52 overseas), the RIB inflow of over Rs 17,000 crore could mean another big push to its growth.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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