Buy SBI on further dip

The State Bank of India stock plummeted 10 per cent on the back of its profits nosediving 99 per cent due to higher provisioning and expected margin erosion. The country’s largest lender reported a net profit of Rs 20.88 crore for the quarter ended March 2011, against Rs 1,866 crore in the year ago period. This was the lowest quarterly profit reported by the bank in 12 years. As a result, the stock fell by almost eight per cent to close at Rs 2,413.60 on the BSE on Tuesday. On Wednesday, it closed at Rs 2,355 on BSE. A poor result but not as much as 99 per cent.

SBI Chairman Pratip Chaudhuri stressed he had cleaned up the balance sheet and that meant the company would bounce back. A report by Emkay Global Financial Services says the cleaning up of all liabilities like pensions and teaser rate loan provisions is a good thing. The bad things are a low Tier I of 7.77 per cent and a sharp rise in slippages to Rs 5,640 crore.

Market experts are bullish on the stock. You should look at holding it as there is an upside of as much as 30 per cent expected from here. Reason: The biggest government-backed bank is at the epicentre of the country’s growth. Once the rights issue is announced, the bank will be in a comfortable cash position. And, the issue could be a good buy if priced below or up to Rs 2,000.

Lower capital adequacy that can restrict growth going forward is a major concern for SBI. Tier I capital ratio of less than 8 per cent may lead to close RBI monitoring, making the rights issue very critical. All this and asset quality concerns could be a deterrent on the stock in the near term and it could fall 5-10 per cent on the higher side. Analysts expect a further fall over one to two months. A good price is being pegged between Rs 2,000-2,200. It could be an opportune time to enter the stock from a medium-to-long-term perspective.