SBI QIP: A hit without being underpriced

Pricing at Rs 287.25 is better than Street's expectations

Whether government-owned banks would garner enough interest in the secondary market has been a recent talking point in the investor community.
 

State Bank of India (SBI), this country's largest, was among the first to announce a plan this year to raise funds — Rs 15,000 crore — through Qualified Institutional Placement (QIP). 

Pricing is an important aspect for all capital raising. Many QIPs get placed only at a discount to the market price. When bank chief Arundhati Bhattacharya was asked if the money could be raised without compromising on valuation, she confidently said the bank would not take more than a five per cent discount to its market price.

 Much to even the chairman’s surprise, reports suggest SBI launched its QIP at Rs 287.25, also the closing price of its stock on Monday. It is the largest secondary market issuance so far by any bank. A QIP issue at the market price suggests good demand. Sources in the know say it was subscribed about 1.7 times, garnering Rs 26,000 crore. Of this, around Rs 11,000 is said to be from domestic institutional investors (DIIs). The rest was from foreign institutional investors (FIIs). 

“Some of the top FIIs such as Franklin Templeton, Temasek and a Canadian pension fund have shown strong interest. Among domestic institutions, the issue was well received by large insurance companies such as ICICI Prudential, HDFC Life and GIC Re,” according to sources.

Life Insurance Corporation (LIC), largest in the segment, is also said to have subscribed for shares worth Rs 5,800 crore in the QIP. About 90 per cent of the transaction was allocated to international long-only funds and domestic institutions.

One of the managers to the issue said this was the country’s largest QIP issuance.  

After this issue, SBI’s capital adequacy gains more comfort. It has increased from 13.11 per cent to 14.5 per cent, eliminating the need to raise money in the next two years. With this, the overhang of fund raising is also behind it; analysts say the focus would shift back to fundamentals. “SBI is among the few public sector banks which is giving stiff competition to private ones and doesn’t have the leadership issues faced by its peers,” says Asutosh Kumar Misra of Reliance Securities. 

Nikhil Khandelwal, managing director of broking house Systematix, adds the market thesis is that SBI, followed by Punjab National Bank, should lead a revival in credit growth. Which is why State Bank of India is valued differently. “The belief is also that the asset quality cycle is nearing its end, and while the provisioning might pinch the financials, its impact will be much lower than what it was in FY17,” he adds.

 This is why he thinks SBI at current levels is an attractive purchase, particularly for institutional investors. Analysts at Citi say its absorption of associate banks should lead to cost synergies, especially on employee expenses. “The merger has given SBI significant scale. This should enable SBI to further gain market share in loans and deposits,” they add.

Given the positives, the consensus 12-month target price for the scrip is Rs 331.71, an upside from now of 15.5 per cent.