State Bank of India (SBI) is a major public sector bank with a market cap of ₹6,80,145 Cr. The stock is currently trading at ₹762, with a P/E ratio of 9.88 and a dividend yield of 1.49%. SBI has shown strong profit growth of 76.1% CAGR over the last 5 years, with an improving ROE of 16.8% in the latest year. However, the company has a high debt-to-equity ratio of 13.9 and a low interest coverage ratio. The promoter holding has remained constant at 57.5% with no pledged shares. Given the mixed indicators, investors should exercise caution and monitor the company’s performance closely before considering an investment.
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TLDR of the article:
Key Financial Data:
- Market Cap: ₹6,80,145 Cr
- Current Price: ₹762
- Book Value: ₹402
- Dividend Yield: 1.49%
- ROCE: 5.20%
- ROE: 16.8% (3Yr average: 12.8%)
- OPM: 45.0%
- Debt to Equity: 13.9
- Promoter Holding: 57.5% (constant)
- Pledged Percentage: 0.00%
Quarterly Results (Dec 2023):
- Revenue: ₹112,868 Cr
- Profit: ₹11,598 Cr
- EPS: ₹12.40
Pros:
- Good profit growth of 76.1% CAGR over last 5 years
- Healthy dividend payout of 17.3%
Cons:
- Low interest coverage ratio
- Poor sales growth of 8.91% over past five years
- Low return on equity of 12.8% over last 3 years
- High contingent liabilities of ₹19,00,096 Cr
Recommendation: The company has a high debt-to-equity ratio of 13.9, which is a concern. However, the promoter holding has remained constant, and there is no pledged holding. The OPM is strong at 45%, and the ROE has improved to 16.8% in the latest year.
Company Introduction, Profile
State Bank of India (SBI) is a Fortune 500 company and the largest public sector bank in India, with a history spanning over 200 years. As of December 2023, SBI has a market capitalization of ₹6,80,145 crore and a stock price of ₹762. The bank has maintained a strong position in the Indian banking sector, with a Capital Adequacy Ratio of 14.50%, a Net Interest Margin of 3.34%, and a CASA Ratio of 45.15% in Q1FY24. SBI has a wide presence across India and globally, serving a diverse customer base. The bank has consistently focused on improving its asset quality, with Gross NPA and Net NPA ratios standing at 4.77% and 1.23%, respectively, in Q1FY24. SBI’s financial performance has been robust, with a profit growth of 76.1% CAGR over the last 5 years and an improving Return on Equity (ROE) of 16.8% in the latest year.
Should We Buy, Sell or Hold This Stock and Why?
Investors should exercise caution when considering investing in SBI stock. While the bank has shown strong profit growth and maintains a healthy dividend payout, there are some concerns to keep in mind. SBI has a high debt-to-equity ratio of 13.9 and a low interest coverage ratio, which may indicate financial stress. Additionally, the bank’s sales growth has been poor at 8.91% over the past five years, and its 3-year average ROE is relatively low at 12.8%.
However, SBI’s promoter holding has remained constant at 57.5% with no pledged shares, suggesting a stable ownership structure. The bank’s Operating Profit Margin (OPM) is strong at 45%, and its current P/E ratio of 9.88 is lower than the industry median of 11.7. Considering these mixed indicators, investors should closely monitor SBI’s performance and look for improvements in key metrics before making a decision.
Vital Company Ratios
- Price-to-Earnings (P/E) Ratio: SBI’s P/E ratio is 9.88, indicating that investors are willing to pay ₹9.88 for every ₹1 of the bank’s earnings. A lower P/E ratio compared to the industry median of 11.7 suggests that the stock may be undervalued.
- Debt-to-Equity (D/E) Ratio: SBI has a high D/E ratio of 13.9, which means that the bank has ₹13.9 of debt for every ₹1 of equity. This high leverage may pose a financial risk.
- Return on Equity (ROE): SBI’s ROE has improved to 16.8% in the latest year, indicating that the bank generates ₹16.8 of profit for every ₹100 of shareholders’ equity. However, the 3-year average ROE is lower at 12.8%.
- Operating Profit Margin (OPM): SBI’s OPM is strong at 45%, suggesting that the bank retains ₹45 as operating profit for every ₹100 of revenue.
- Dividend Yield: SBI offers a dividend yield of 1.49%, which means that investors can expect to receive ₹1.49 in dividends for every ₹100 invested in the stock.
Key data points from the provided information:
- Promoter holding: Constant at around 57.5% from Mar 2021 to Dec 2023
- FII holding: Increased from 9.94% in Mar 2021 to 10.91% in Dec 2023
- DII holding: Decreased from 24.40% in Mar 2021 to 24.15% in Dec 2023
- Sales trend: Increasing, with a 5-year growth rate of 8.91% and a TTM growth rate of 28%
- Profit trend: Increasing, with a 5-year CAGR of 76.1% and a TTM growth rate of 46%
- Debt trend: High debt-to-equity ratio of 13.9
- Margin trend: OPM at 45%, but financing margin has been negative
- Company PE: 9.88, lower than the industry PE of 9.85
- Gap between intrinsic stock value and current market price: Intrinsic value of ₹1,579.44 vs. current price of ₹762
- Market cap: ₹6,80,145 Cr.
- Cash in hand: ₹45,880 Cr. as of Mar 2023
- Dividend payout: 18% in Mar 2023
Competing companies and performance
SBI’s main competitors in the public sector banking space include Punjab National Bank, Bank of Baroda, Union Bank of India, and Canara Bank. Compared to its peers, SBI has the largest market cap at ₹6,80,145 Cr., followed by Punjab National Bank at ₹1,49,970 Cr. and Bank of Baroda at ₹1,39,291 Cr. SBI’s P/E ratio of 9.88 is lower than the median of 11.7 for the 12 companies in the sector, indicating potential undervaluation. However, SBI’s ROCE of 5.20% is slightly higher than the median of 4.65%. In terms of quarterly performance, SBI reported the highest net profit of ₹11,598 Cr. and sales of ₹1,12,868 Cr. in Dec 2023, outperforming its peers. While SBI’s 5-year sales growth of 8.91% is lower than the sector median of 21.34%, its profit growth of 76.1% over the same period is significantly higher than its competitors.
Recommendation: Based on the provided data and analysis, the recommendation for SBI stock would be CAUTION. While the company has shown strong profit growth and has a lower PE ratio compared to its industry peers, the high debt-to-equity ratio of 13.9 and the decreasing financing margin are concerns. Additionally, the promoter holding has remained constant, and there is a significant gap between the intrinsic stock value and the current market price. Investors should closely monitor the bank’s performance, particularly its ability to manage its debt and improve its margins, before making a decision to buy or sell the stock.
Is This Stock Overvalued or Undervalued?
Based on the provided data, SBI stock appears to be undervalued. The current market price of ₹762 is significantly lower than the intrinsic value of ₹1,579.44, suggesting that the stock is trading at a discount. Additionally, SBI’s P/E ratio of 9.88 is lower than the industry PE of 9.85, indicating that the stock is relatively undervalued compared to its peers.
Should We Buy This Stock and Why?
The recommendation for SBI stock would be CAUTION, based on the following factors:
- High debt-to-equity ratio of 13.9, which indicates significant financial leverage and potential risk.
- Decreasing financing margin, from -6% in Jun 2023 to -16% in Dec 2023, suggesting pressure on profitability.
- Poor sales growth of 8.91% over the past five years, compared to the median sector growth of 21.34%.
However, there are some positive aspects to consider:
- Strong profit growth of 76.1% CAGR over the last 5 years and 46% TTM growth.
- Consistent promoter holding at around 57.5% with no pledged shares, indicating a stable ownership structure.
- Improving ROE, reaching 16.8% in the latest year, although the 3-year average is lower at 12.8%.
Given the mixed indicators, investors should monitor SBI’s performance closely and look for improvements in key metrics before making a decision to invest.
How Is the Industry of This Company Growing?
The banking industry in India, particularly the public sector, has been experiencing growth, albeit at a slower pace compared to private sector banks. Based on the peer comparison data provided, the median sales growth for the 12 companies in the sector over the past quarter was 21.34%, while the median profit growth was 31.91%. SBI’s quarterly sales growth of 23.33% is higher than the median, but its profit growth of 3.87% is significantly lower.
The industry is facing challenges such as rising non-performing assets (NPAs) and pressure on net interest margins. However, the overall growth in the economy and the government’s focus on financial inclusion are expected to drive growth in the banking sector. SBI, being the largest public sector bank, is well-positioned to capitalize on this growth, but it needs to address its internal challenges such as high debt and declining margins to improve its performance relative to its peers.
Risk Factors related to SBI and the banking industry:
Business/Commercial Risks:
- Competition: SBI faces intense competition from private sector banks and non-banking financial companies (NBFCs) in terms of offering competitive interest rates, innovative products, and better customer service.
- Regulatory changes: The banking industry is heavily regulated, and any adverse changes in regulations, such as higher capital requirements or stricter NPA recognition norms, could impact SBI’s profitability and growth.
- Economic slowdown: A slowdown in the Indian economy could lead to reduced credit demand, higher defaults, and increased NPAs, affecting SBI’s asset quality and profitability.
Key Risks Associated:
- Asset quality deterioration: SBI has a high level of NPAs (Gross NPA of 4.77% and Net NPA of 1.23% in Q1FY24), which could further worsen if the economy deteriorates or if the bank fails to effectively manage its loan portfolio.
- High debt levels: SBI has a high debt-to-equity ratio of 13.9, which could limit its ability to raise additional capital and manage its balance sheet effectively.
- Margin pressure: The banking industry is facing pressure on net interest margins due to increased competition and lower interest rates, which could impact SBI’s profitability.
Risks to Consider Before Investing:
- Government ownership: As a public sector bank, SBI is subject to government influence and may be required to undertake certain activities that may not be in the best interest of shareholders.
- Technological disruptions: The rapid adoption of digital technologies in the banking sector could pose a risk to SBI if it fails to keep pace with technological advancements and changing customer preferences.
- Global economic uncertainties: As a large bank with international exposure, SBI is vulnerable to global economic uncertainties and geopolitical risks that could impact its growth and profitability.
Management Quality Assessment
Based on the information available in the public domain, there are no reported criminal cases against the current promoters and management of SBI. However, as a public sector bank, SBI has seen changes in its top management over the years, with the government appointing the Chairman, Managing Directors, and other key executives.
The current Chairman of SBI is Dinesh Kumar Khara, who has over three decades of experience in the banking industry. He is a seasoned banker and has held various key positions in SBI, including Managing Director (Global Banking & Subsidiaries) and Managing Director (Associates & Subsidiaries).
While the management team of SBI is experienced and well-qualified, the bank’s performance and decision-making are subject to government influence, which could be a potential risk factor for investors to consider.
Recommendation: Based on the analysis of the provided data and the risk factors discussed above, the recommendation for SBI stock would be CAUTION. While the bank has shown strong profit growth and has a stable promoter holding, the high debt-to-equity ratio, declining margins, and asset quality concerns are key risks to consider. Investors should closely monitor the bank’s performance and risk management practices before making an investment decision.
Long-term Performance (6-10 years)
In the long term (6-10 years), SBI’s performance will depend on its ability to manage its asset quality, improve profitability, and adapt to the changing banking landscape. The bank has shown a strong profit growth of 76.1% CAGR over the last 5 years and an improving ROE, which reached 16.8% in the latest year. If SBI can maintain this momentum and effectively address its challenges, such as high NPAs and a high debt-to-equity ratio, it has the potential to deliver strong long-term growth.
However, the bank’s sales growth has been relatively low at 8.91% over the past five years, and its 3-year average ROE of 12.8% is lower than its latest year ROE. SBI will need to focus on improving its interest margins, reducing its NPAs, and capitalizing on the growing demand for banking services in India to ensure sustainable long-term growth.
Short-term Performance (2-5 months)
In the short term (2-5 months), SBI’s stock performance will be influenced by various factors such as quarterly results, asset quality trends, and overall market sentiment. The bank’s quarterly profit growth has been relatively low at 3.87% in the latest quarter (Dec 2023), compared to the median sector growth of 31.91%. However, SBI’s strong market position, stable promoter holding, and improving ROE could provide support to its stock price in the near term.
Investors should closely monitor the bank’s upcoming quarterly results, asset quality trends, and any regulatory developments that may impact its performance. Short-term stock price movements can be volatile and may not necessarily reflect the bank’s long-term prospects.
Medium-term Performance (2-6 years)
In the medium term (2-6 years), SBI’s performance will be shaped by its ability to capitalize on the growth opportunities in the Indian banking sector while effectively managing its risks. The bank’s strong market position, extensive branch network, and government backing provide a solid foundation for growth.
However, SBI will need to focus on improving its operational efficiency, reducing its cost of funds, and maintaining a healthy asset quality to drive sustainable growth. The bank’s OPM of 45% is strong, but its high debt-to-equity ratio of 13.9 and declining financing margins could pose challenges in the medium term.
Investors should monitor SBI’s progress in reducing its NPAs, improving its net interest margins, and maintaining a healthy capital adequacy ratio. The bank’s ability to adapt to the changing technological landscape and compete with private sector banks will also be crucial for its medium-term success.
Recommendation: Based on the analysis of the provided data and considering the long-term, short-term, and medium-term outlook, the recommendation for SBI stock would be CAUTION. While the bank has shown strong profit growth and has a stable promoter holding, the high debt-to-equity ratio, declining margins, and asset quality concerns are key risks to consider.
Investors with a long-term perspective may consider investing in SBI, given its strong market position and growth potential. However, they should be prepared for potential volatility and closely monitor the bank’s performance and risk management practices.
Those with a shorter investment horizon should exercise caution and wait for clear signs of improvement in the bank’s asset quality, profitability, and overall financial health before making an investment decision.