Strength in SBI stock going ahead will depend on earnings growth: Analysts

While analysts do not see a specific tailwind that can cause a re-rating in the short term, they see headroom for outperformance in long-term

Shares of India's biggest public sector lender, State Bank of India (SBI) have seen a one-way rally over the past few weeks. Since February 4, the day the lender announced its December quarter (Q3) results for the current financial year 2023-24 (FY24), the shares have rallied 22 per cent at the bourses as against a 2.8-per cent rise in the benchmark S&P BSE Sensex.

On Thursday, the stock hit a fresh lifetime high of Rs 793.5 per share, with the market capitalisation hitting Rs 7.06 trillion intraday. It topped the Rs 7-trillion mark for the first time on Tuesday.

Analysts attribute the stock's recent outperformance to consistent earnings growth driven by asset quality improvement, lower slippages, higher recoveries, and some write-offs.

SBI had reported a net profit of Rs 9,164 crore in Q3FY24, down 35.5 per cent year-on-year (Y-o-Y) and 36 per cent quarter-on-quarter (Q-o-Q).

While net interest margin (NIM) declined to 3.34 per cent during this period, the bank's gross non-performing asset (NPA) ratio and net NPA ratio improved by 72 basis points and 13 basis points Y-o-Y, respectively.

Going ahead, analysts believe the stock will remain on a gradual uptrend, catching up with the rally in other PSU stocks that have surged up to 119 per cent over the past six months. Within these, public sector banks have soared up to 102 per cent during the period.

By comparison, SBI advanced 36 per cent in six months, the Sensex index 12 per cent, and the BSE Bankex index 8.2 per cent.

However, the strength in the rally in the months ahead will be a function of earnings growth, they said.

"The rally in the stock, thus far, was on the back of valuation re-rating in public banks. The gap, however, has been bridged over the past one-two years. We believe most of the re-rating is done and the move, here on, will depend on the bank's financial performance quarter-on-quarter," said Narendra Solanki, head of fundamental research at Anand Rathi Shares and Stock Brokers.

The management aims to achieve 15 per cent loan growth in the next financial year (FY25) on the back of a strong macro environment. Loan growth stood at 13 per cent in Q3FY24.

"Retail loans are expected to continue healthy growth momentum in FY25, while the small-medium enterprises (SME) segment is likely to outperform other segments. Besides, the capex momentum has started picking up, aiding wholesale growth in FY25," the management said at the JM Financial India Conference (Singapore), 2024.

On the margin front, SBI expects NIMs to remain stable around current levels, with no further deposit rate hike likely going forward.

"We expect SBI to deliver steady performance, adjusting for various one-offs. Loan growth is likely to be lower than the industry average, while NIM is expected to stay elevated as it is the primary revenue source," said analysts at Kotak Institutional Equities.

The brokerage maintains a 'Buy' rating on the stock as the bank has withstood most concerns, with negligible impact on earnings.

"We do not see a specific tailwind that can cause a re-rating in the short term, but we see headroom for outperformance over other public and private banks," it added. 

The brokerage has a target price of Rs 850 for SBI, valuing the stock at 1.4X book and 10X earnings for return on earnings (RoEs) at 15 per cent.

Against this, analysts suggest adding SBI's stock on dip from a long-term perspective. The counter, according to Santosh Meena, head of research, Swastika Investmart (near-term target Rs 880; 12-month: Rs 1,100), witnessed a remarkable surge from Rs 30 to Rs 300 during the 2003–2007 bull- market phase, following a decade of consolidation.

"After a decade of consolidation, the recent breakout above the Rs 300 level in 2021 suggests the potential for a significant upward movement. During its peak valuation in the previous bull run, SBI traded at a price-to-book value ratio of 3.5x, compared to current valuation of less than 2x, indicating considerable upside potential," Meena said.