State Bank of India

On Firm Ground-Buy:

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State Bank Of India

Tech Mahindra

1.State Bank of India (SBI), the nation’s largest bank, has shown strong operating performance, supported by a huge network (more than 11,000 branches), a wide customer base, and a high share of CASA deposits (40% at the end of Q2'09).

2.The Bank intends to expand its branch network in the rural and semiurban areas, which are highly underpenetrated, to 10,000 by FY10 on the back of enhanced technology. The improved operational efficiency,coupled with higher CASA deposits, should ensure sustained profitability.

3.For FY09, we expect SBI's deposits and advances to grow by 26–28% and 27% yoy, respectively. However, given the high cost of funds and the declining PLRs, we expect the net interest margin to contract in FY09 but pick up thereafter. NPAs are likely to remain at reasonable levels,supported by a diversified loan book, judicious lending, and stricter monitoring.

Our fair value estimate of Rs. 1,541 for SBI's stock is based on the sumof-the-parts valuation. We have valued the standalone business at Rs.1,210 by using the Discounted Equity Cash Flow model, assuming a sustainable RoE of 15.9%. The associate banks have been valued at Rs.185, based on a target P/B of 1.0x. SBI Life has been valued at Rs. 124, a target NBAP multiple of 13x. The AMC has been valued at Rs. 13 (at 4.5% of its AUM), and the remaining subsidiaries have been valued at Rs. 9.

HDFC Bank:

Stalwart In The Crisis-Buy:

1.HDFC Bank is one of the leading private sector banks that has consistently created value for shareholders. Its earnings have grown by a CAGR of 35% during 2006–08, exhibiting an average ROE of 15.5%. Over the same period, the Bank's balance sheet grew by a CAGR of 35%, wherein deposits jumped by 35% and advances rose by 34%. The Bank's earnings have been supported by a sustained, above-industry average net interest margin (NIM), which is primarily driven by its large, low-cost deposit base.As of March 2008, the Bank's CASA stood at 54.5%. With gross NPAs at 1.57%, HDFC Bank's asset quality is one of the best in the industry.

The merger with Centurion Bank of Punjab has given HDFC Bank access to a large deposit base and wholesale banking clients, which can assist the latter in growing its business and network faster.

3.For FY09, we expect HDFC Bank's deposits and advances to grow by 25% and 26% yoy, respectively. However, we expect the CASA and the NIM to come under pressure. At the same time, the asset quality is unlikely to undergo a significant deterioration, given the conservative lending standards and a small exposure to the sensitive sectors.

4.We have valued the Bank's stock by using the Discounted Equity Cash Flow model. Assuming a 14.9% cost of equity and a 10.5% terminal growth rate, we have arrived at a fair value estimate of Rs. 1,249. This implies an upside of 27.5% over the current market price of Rs. 979.8. Therefore, we affirm our Buy rating.