‘Invest in these two PSU banks for double-digit returns in long term’

Manali Bhatia

Apparently, as India’s economy is picking the pace, the global economy is progressively lagging. India’s retail inflation has eased to a 19-month low of 2.05 percent, GDP is expected to grow at 7.1-7.3 percent in FY19 and CAD may also come under 2.5 percent for FY19. The loan growth has increased to 14.50 percent YoY as on February 2019 but still, some challenges prevails due to lack of liquidity in the market as deposit growth is only 9.6 percent.

On the other hand, we do not find worldwide economic factors to be very supportive. The Nikkei Japan Manufacturing PMI declined to 48.5 in February 2019. China’s passenger car sales fell for a seventh straight month, down 17.7 percent (YoY) in Jan. US industrial output dropped 0.6 percent in January 2019 and manufacturing production fell 0.9 percent, primarily as a result of a large drop in motor vehicle assemblies.

Furthermore, the general election is expected to bring in a bit of comfort. It could be said as a big upcoming event for the market. However, tension in Indo-Pak tensions on the other end would embark a stagnant market. We expected a pre-election rally due upcoming week, but this appears difficult due to aforesaid stated issue. Besides all these, Nifty P/E and P/BV are trading on a higher side at 26.32x and 3.41x, respectively.

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Breakout failure at 11,000 has again pushed the Nifty back in the range of 10,580 on lower side and 10,990 on the higher side. In coming week also, it’s likely to trade in the same range with a slight negative bias. There are certain points that need traders’ attention:

-Low of Doji candlestick pattern formed on Jan 29, i.e. 10583.65, is likely to act as an important support in days to come. In the last week, we have witnessed a pullback from the same level.

-Any pullback is likely to be short lived as 200-Day Moving Average at 10,861 is likely to act as an immediate resistance which, if trades on higher side could further strengthen the bulls till 10,990. So to put the things into perspective, we think, sell-on-rise would be a fruitful strategy for traders.

-Banks, especially PSUs, in the past months have faced multifold problems. Financial as well as liquidity crunches and stringent norms for banks created panic. Despite the stated reasons, we recommend to buy two PSUs that have delivered sequential growth and improved fundamentals beating our calculations and are available at attractive valuations.

SBI |Rating: Buy | CMP: Rs 271 | Target: Rs 319 | Return: 18 percent| Long term

Net Profit was at Rs 3,955 crore, 318.56 percent rise during Q3FY19 against loss of Rs 2,416 crore in the preceding quarter of the previous year. Credit cost has declined sharply by 105bps providing cushion for earning growth. Higher credit growth, better spreads and lower slippages have led to domestic Net Interest Margins increasing to 2.97%.

There has been sustained improvement in asset quality with GNPA, Net NPA and PCR improving to 8.71 percent, 3.95 percent and 74.63 percent, respectively. Moreover, recovery in Written-Off accounts registered a very robust growth of 81.94 percent YoY from Rs 3,221 crore in 9MFY18 to Rs 5,860 crore in 9MFY19.

Loan growth in FY19 for SBI is guided to be 14 percent, in line with industry slated growth at 15 percent. As the bank is still short of priority sector lending target and keeping this in line, management expects to bring in around Rs 45,000 crore loans from NBFCs. Though, the bank is looking for buying from non-priority sectors as well.

Merger issues and asset quality concerns have been far behind for SBI. With a reduction in credit cost combined with improvement in NPAs, setting aside lower provisions for bad loans, SBI is expected to post good earnings show going ahead.

The recent moderation in bond yields is expected to provide a boost to treasury performance additionally. We recommend buying the stock as SBI is available at an attractive valuation. Estimating P/BV at 1.20x (Est 5yr avg.) for FY20, the estimated share price turns around to Rs 319.

Canara Bank | Rating: Buy | CMP: Rs 222 | Target: Rs 277 | Return: 25 percent| Long term

During the first nine months of the current fiscal, the Net Interest Income (NII) grew a healthy 19.6 percent YoY. Further, the provision coverage ratio has improved 670 bps to 62.54 percent from the December 2017 level of 55.81 percent. Also, unbroken efforts to boost the asset quality have marked well for the bank. Rich restoration and up-gradations have helped GNPA decrease 31bps to 10.25 percent combined with net NPA lower by 17bps at 6.37 percent.

The capital optimisation measures taken by the bank have led to a decrease in risk-weight density to 87.39 percent as of December 2018 from 91.27 percent as of December 2018. Indeed, the well capitalised position of the bank will provide helping hands for further credit growth. Domestic NIM improved to 2.85 percent.

Bank expects global NIM to reach 2.75 percent (currently 2.65 percent) going forward and aims at improving the bottom-line further with balanced thrust on both retail and corporate advances coupled with increased adoption of digitalisation for efficiency improvement. Going forward, it intends to continue with the growth in the retail advances, simultaneously focusing on improvement in the corporate book with high rated corporate advances.

Management is highly confident to maintain itself as one of the leading market players in the industry with adequate capital to strive for business growth.

We expect Canara Bank to post sharpened numbers going forward. We estimate P/BV at 0.65x (Est. 5yr avg.) for FY20, for a target of Rs 277.

The author is a Senior Research Analyst at Rudra Shares & Stock Brokers Ltd.

Disclosure: Rudra or its research analysts, or his/her relative or associate do not have any direct or indirect financial interest (except L&T Finance Holdings Ltd.) nor any other material conflict of interest at the time of stock recommendation, in the subject company. Also, Rudra or its research analysts, or his/her relative or associates does not have actual/beneficial ownership of one percent or more securities of the subject company.

Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Feb 24, 2019 02:32 pm

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