lol... are we now discussing the state of individual PSUs in India
??
btw, on topic, SBI is an excellent buy opportunity at the moment.. Here's why...
Usually, we look at three components of value for a company. The value of its assets, the value from earning power and the value from growth in this earning power. Since SBI's business is about earning returns by leveraging its capital base (net worth), we need to bother about only the first component of value - that of its assets. Here again, we will focus on the adjusted book value which means
reducing net non-performing asset from the net worth and then, dividing it by the number of shares.
Book value
SBI's net worth at the end of December 2010 stood at Rs 722.3 bn. With 635 m shares outstanding, the book value was Rs 1,137.6 per share. The adjusted book value was Rs 953.4 per share. However, we believe book value or historical cost is a gross underestimation of the true worth of the company given the quality of the underlying assets.
The bank has been laying down the foundation for further growth by increasing its employee base, spending money on financial inclusion and infrastructure through ATMs and new branches. It has also been trying to clean up its balance sheet by reducing NPAs. The bank has also mobilised resources through overseas bonds, retail bonds and the like. With its Rs 200 bn proposed rights issue in FY12, the bank will be seeing a massive influx of equity capital. All these efforts are expected to reap dividends over the years to come.
For SBI's future adjusted book value we have assumed that there will be no equity dilution after FY13. Also the retained profits have been assumed at a 25% discount to the normalised return on equity of 16%. Giving a range of 1.25 to 1.75 price to adjusted book value multiple, we estimate the bank will be worth anywhere between Rs 3.5 trillion and Rs 4.9 trillion by FY20. Please note that we have taken care about not being over optimistic even at the higher band.
We have currently only valued the standalone entity of State Bank of India. Overall, the bank had 29 subsidiaries, 6 joint ventures and 26 associates as of March, 2010. This included five associate banks which are expected to be merged with the parent over the next few years. As of now only 2 associate banks, i.e. State Bank of Indore and State Bank of Saurashtra have been consolidated. The merger of associates will add value to the entity, and enable it to expand its presence and showcase a uniform brand across the country. The bank also has major subsidiaries in investment banking (SBI Cap), insurance (SBI Life), etc. The unlisted subsidiaries, once listed, will unlock value for SBI's shareholders.
