Brokers divided on SBI’s results, not everybody negative

Opinions seem divided — while some believe the dip is a buying opportunity, others remain firmly negative

CLSA said, "SBI's healthy operating profit growth once again failed to feed through to net profit level as loan loss provisions continued to rise because of which net profit has been around Rs25 billion for the past nine quarters. SBI continues to leverage its size and technology platform to build its deposit franchise, grow fee revenues, but asset quality remains a drag and, in our view, will remain so for the next few quarters. At 15%, RoEs are lower than peers while valuations are at premium."

Kotak's view is more optimistic: "Slippages continued to remain high (at Rs44 billion, 2.7%) and were somewhat disappointing resulting in higher provisions and lower profits. We expect the stock price to correct in the near term, as result expectations were running high coupled with a very strong price performance in recent times. Retain positive view. Stock trades at 2x FY2012E PBR for core banking business. BUY with a TP of Rs 3,500."

Motilal seconds Kotak's optimism: "Adjusted for life insurance valuation, SBI trades at 1.9x FY12E Consol BV of Rs1,656 and 11.1x FY12E Consol EPS of Rs282. Standalone RoE will be 18.5% in FY12E. Given the sharp run-up up over the past few days and below-estimated earnings, the stock is likely to correct in the very near term. We see this as a buying opportunity and are bullish on core operating profitability. Maintain Buy."

Edelweiss downgraded the stock saying, "Asset quality woes continue, showing up in higher-than-expected slippages and management's guidance for higher-than-average slippages over the next few quarters. After adjusting for subsidiaries' valuation of INR 229, the stock is currently trading at 1.9x FY12E adjusted (cons.) book, leaving limited upside. Hence, we are downgrading our recommendation and rating on the stock from 'BUY' to 'HOLD'."

The main problem with SBI's results is the lack of profit growth. As CLSA puts it, "Net profit has remained around Rs25 billion for nine quarters, primarily due to sharp rise in provisions (Rs26 billion now v/s Rs6 billion in 2QFY09). Every quarter has some 'one-offs' (pension provisions, treasury gain/loss, interest on income-tax refunds etc) but the end result is same - flat net profit." This has led to a sharp contraction in RoE which is now at 15% versus around 18% for peers.

Other perceived negatives include annualised delinquency ratio at +3%, amongst the highest in the sector, the SBI chairman's statement that slippages will remain high in coming quarters, and the possibility that loan-loss provisions will remain high for a few more quarters. SBI also has a longer duration of bonds in the available for sale book (2.8 years), making it vulnerable to rising bond yields.

Key positives are CASA growth at 28%, fee income growth, and rising NIMs. Focus on shedding bulk deposits and excess liquidity in the balance sheet is also viewed as a long-term positive.

SBI shares have fallen after it declared its Q2 results seen by most market observers as disappointing.

The stock hit an all-time high of Rs3,515 on 8 November 2010.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).


Cash Level & Markets

It could well be, if you go by the widespread pessimism among institutional investors. The Merrill Lynch survey of 213 global institutional investors is excessively gloomy. Some 60% of them see the global economy weakening. It happens to be the most negative reading in the survey’s history. As happens in financial markets, the mood change has been sudden and sharp. In April, only 5% of respondents expected the economy to weaken. The reason for the sudden gloom now? Rising energy prices and a lagged effect from higher interest rates.

As a result, 27% of the respondents reported that they were taking lower-than-normal risks with their investment strategies or portfolios, compared to their benchmarks, up from 23% in June. One way to reduce risk is to increase the cash position. A net 31% of institutional investors are now overweighted in cash, up from 29% a month ago and only 10% in April. The Merrill survey said that this is the second highest reading for this position in five years.

Now, if institutional investors (who can move market with hundreds of billions of dollars under management) are so pessimistic, why would we say that the market is about to surprise us on the upside? Because excessive emotion among institutional investors is usually a contrarian signal. When pessimism is high, money moves into cash or safe assets like government bonds. It is precisely at that time that a light bit of good news can produce a huge market rally. So, high cash position can be a contrarian indicator.

For instance, it was in March 2000 that the US fund managers recorded their maximum optimism in 30 years - the exact month that the Nasdaq index started its 80% decline. Often, fund managers are fully invested at the top of the market, and have tons of cash at market bottoms.

There are no studies based on Indian data, but according to a US study, when fund managers have lots of cash on hand, typically more than 9.5% of the fund’s assets in cash, stocks actually do extremely well. Between 1970 and 2005, fund managers were scared of stocks and therefore held more than 9.5% of their funds in cash roughly 20% of the time. During these 20 instances, on an average, the stock market was up by an astounding 18% just 12 months later. And when fund managers had less than 6% of assets in cash (27% of the time), then 12 months later, on an average, stocks were up only 1.2%.

During the 1990-1991 recession, instead of buying, fund managers were scared. They had 12.9% of their assets in cash. They should have been buying, not holding in cash because the market continuously rose thereafter. As the market rose through the 1990s, fund managers got bolder and complacent. By March 2000, fund managers held only 4% of their assets in cash, the all-time low, corresponding with the all-time peak in Nasdaq.

In the middle of June 2005, fund managers had just 4% of their assets in cash. The subsequent performance has been poor. Jason Goepfert, who scientifically analyses market sentiment (, took this finding forward and added short-term interest rate to the picture. After all, if short-term interest rates are high, fund managers should hold more cash. Following this logic, Goepfert found that 55% of cash holdings of mutual fund managers could be explained by the level of interest rates. So he came up with a formula for how much cash a fund “should” have, based on the current level of interest rates, which he calls Mutual Fund Cash Premium/ Deficit. This is worked out based on the dataset that goes as back as 1956.


Bharti plans to prepay up to $900 mn of debt

New Delhi: Sitting on a good amount of cash flows, Bharti Airtel today said it will consider prepaying up to $900 million of the debt it raised while acquiring African operations of Zain telecom in June this year, reports PTI.

The company is looking at prepaying a part of the debt.

It would be in the range of $800-900 million, Bharti Group chief financial officer Manik Jhangiani said.

The total cost of the Bharti-Zain deal that was signed in June was at $10.7 billion. This included an equity value of $9 billion and $1.7 billion of consolidated debt obligations.

Bharti had borrowed $7.5 billion from different banks to finance the acquisition of Zain.

According to Mr Jhangiani, flexibility of prepayments has always been part of the loan agreement and Bharti has the option of prepaying based on its cash flow.

The company had seen significant free cash flows over the past few quarters.

Bharti’s results for the three months ended 30th September show the telco’s cash balance on the books at Rs1,737 crore.

Originally, 11 banks led by Standard Chartered Plc, had underwritten the $7.5 billion loan.

Besides, the company could also look at an initial public offer for its tower unit, although there is no definite plan, Mr Jhangiani said.

Bharti Infratel is one of the tower units of Bharti Airtel. It is a wholly-owned subsidiary of Bharti.


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