Company Profile. STATE BANK OF BIKANER & JAIPUR. (SBBJ) - BUY 25 th Apr, 2011 RESEARCH ANALYSTS

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1 STATE BANK OF BIKANER & JAIPUR. (SBBJ) - BUY 25 th Apr, 2011 Stock Metrics BSE Group BSE Code Bloomberg Code Market Capitalization B SBBJ IN ` 3,913 Cr Face Value ` 10 Price/BV 1.15x Book Value ` /- 52 Wk High (BSE) ` (Aug 25, 2010) 52 Wk Low (BSE) ` (May 25, 2010) Average Volume CMP ` 564 Company Profile State Bank of Bikaner & Jaipur (SBBJ) was incorporated in The bank is promoted and managed by State Bank of India group and is the largest associate bank of SBI. It is professionally managed Public Sector Bank with a track record of uninterrupted profitability and dividend payment. It came into existence after amalgamation of the erstwhile State Bank of Jaipur with State Bank of Bikaner. The bank's main area of operation is the state of Rajasthan and basically caters to the industrial & agricultural sector. It has a network of 899 branches and 996 ATM s as on 15 th Feb, All the branches are on core banking solutions platform. SBBJ enjoys a strong parentage and brand name of its promoters SBI which acts as an enormous advantage in attracting a lot of client base. The bank has a Capital Adequacy Ratio of 11.41% and is well capitalized to fund its growth plans going forward. The bank has been continuously earning profits since its inception. RESEARCH ANALYSTS ANSHUMAN JAIN anshuman.jain@inventuregrowth.com DIVYA KANT divya.kant@inventuregrowth.com 201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 1

2 Shareholding pattern as on March, 2011 PRE Rights Issue Shareholding Source: Company SBBJ is coming out with a rights issue of ` 780 Cr. The ratio for rights issue for existing shareholders is for every 5 shares they are entitled for 2 shares. The price for existing rights issue is ` 390/- per share (including a premium of ` 380/- per share). SBBJ will issue 2 Cr shares as rights issue thereby increasing the total no of shares from existing 5 Cr shares to 7 Cr shares. The record date for the same was Mar 17, 2011 Assumed Post Rights Issue Shareholding Pattern on Successful Completion of Rights Issue Pre Rights Issue Shareholding Post Rights Issue Shareholding Promoters 3,75,35,000 5,25,49,000 FII 15,55,000 21,77,000 DII 11,00,000 15,40,000 Others 98,10,000 1,37,34,000 Total 5,00,00,000 7,00,00, , Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 2

3 Investment Rationale Growth Story intact: India s GDP is expected to grow % subject to normal monsoons in FY12. This growth figure will be constantly need supported of the banks and SBBJ has healthy presence in the agriculture & industrial sector which will enable to boost its performance going ahead. Strong Parentage: The bank has a strong parentage and been an associate bank of SBI. The bank enjoys an higher lending business via consortium lending, strong banking systems & processes and good depositor base along with prudent risk management systems Strong Regional Presence: Rajasthan is the largest State in India geographically, covering 10.4% of the total area and 5.5% of the total population in the country. Agriculture plays an important role in the State s economy since about 76.6% people live in rural and semi-urban areas and 2/3 rd of the State population depends upon agriculture and allied activities for their livelihood. The state of Rajasthan is showing handsome growth in GSDP (Gross State Domestic Product) and the state performance on the uptrend Economic Growth Rate as Per GSDP P: Provisional Q: Quick A: Advance Source: Economic Review Gov of Rajasthan During , the State has received deficient monsoons to the extent of 33.6%, as a result of which agriculture production was impacted by 35.8%.Hence the GDP was impacted However normal monsoons in has boosted the economy. Further in India is likely to see a normal monsoon. 201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 3

4 GSDP (Rs in Cr) Source: Economic Review Gov of Rajasthan Rajasthan as a state is progressing well and contributing to the success of the nation. The GSDP is growing at a CAGR 7 % in last 3 years at constant prices & CAGR 15.9 % in last 3 years at current price. Sector Contribution of GSDP At Constant ( ) Prices At Current Prices The bank has strong presence in the industrial & agricultural sectors ~ 85 % of the total branches are located in the state of Rajasthan. Source: Economic Review Gov of Rajasthan 201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 4

5 CASA Advantage: SBBJ has most of its branches ~ 85 % located in the state of Rajasthan even though there is regional concentration of the branches the key positive for the bank is robust share of low cost deposits. The CASA ratio of the bank as on 31 st Dec, 2010 stood at 42 % V/s 39% as on 31 St Mar, The CASA ratio of the bank is even better than some of the large public sector peers and beats the industry average of ~35 %. Reduction in High Cost Bulk Deposits: The bank is focused on reducing the high cost bulk deposits and certificate of deposits to total deposits which has been brought down from 29.5% in FY08 to ~14 % in FY10. However the higher inflation and rising interest rates could dampen the bank efforts Consistent return on Equity: Another positive for SBBJ is consistent return on Equity of ~ % in last 4 years and a reasonable return on assets. The ROA WAS 0.83 % (annualized 9MFY11). ROA gives an idea that how SBBJ efficient management is at using its assets to generate earnings Leveraging on Technology: SBBJ is favorably positioned to leverage technology to enhance its fee based income. SBBJ has successfully introduced launched an E-Trade facility during in association with SBI Cap Securities Ltd. The bank has been receiving an encouraging response & all the branches of the Bank have been authorised to source the applications for Demat and E-trade accounts. Further the existing revenues from cross selling of insurance, mutual funds and credit card products may aid noninterest income growth Rights Issue: SBBJ is raising Rs to augment its capital base as well as 780Cr as well as funding its loan book growth. SBI s plan to consolidate its associate banks with itself in the near to medium term outlines strong outlook to SBBJ prospects. 201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 5

6 Risk & Concerns Asset Quality: SBBJ has reported a CAGR of ~12 % in advances in last 3 years which is at par with its peers such as Bank of Maharashtra, State Bank of Travancore & State Bank of Mysore. Though the banks gross NPA & net NPA have shown slight improvement during the last 3 years it has deteriorated in the 9MFY11 primarily attributed to NPA on agricultural loans. As on 31 st Dec 2010 GNPA stood at 2.35 % while NNPA AT 1.02 % V/s GNPA 1.72 % and NNPA of 0.77 % as on 31 st Mar, Risks in forms of loans to priority sector form ~ 45 %of the adjusted net bank credit and the state of Rajasthan account ~50 % of the bank loans and deposits. Further the costs of funds have been a slight dampener for the bank in last 2-3 years. For the year ended 31 st Mar, 2010 BBJ cost of funds stood at 5.77 % and cost of deposits 6.2 % which is higher than SBI aggregate of 5.3%. This is expected to increase going forward since banks bettering of the CASA ratio as well as continued efforts of discarding the bulk deposits. High inflationary trends in India and rising interest rates scenario i.e. borrowing & deposit rates could put pressure on NIM & affect the bank prospects. As per industry experts higher interest rates are on the verge of peaking out and interest rates are expected to fall going forward. 201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 6

7 Financials - Income Statement (` in Cr) Particulars FY10 FY11E FY12E Interest Earned (a+b+c) 3, , , a) Interest/Discount on adv Bills 3, , b) Income on Investments ,062 c) Interest on Bal with RBI Other Income (d) Total Income (e) 4, , , Interest Expended (f) 2, , , Operating Expenses g(i + ii) , , i) Employee cost , ii) Other Operating Exp Total Expenditure h(f + g) 3, , , Operating Profit Before Provision & Contingencies (e h) , Less - Provision & Contingencies (other than tax) PBT Tax PAT Equity Capital(fv ` 10) EPS , Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 7

8 Consolidated Balance Sheet (` in Cr) Particulars FY10 FY11E FY12E LIABILITIES Share Capital Reserves and Surplus 2, , , Deposits 46, , ,939 Borrowings 2, , ,120 Other Liabilities & Provisions 2, ,013 3, Total 54, , , ASSETS Cash & Bal with RBI 3, ,780 4,729 Bal with Banks & Money at call & short notice Investments 13, , ,287.5 Advances 35, , , Fixed Assets Other Assets ,325 Total 54, , , , Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 8

9 Ratio analysis FY 10 FY 11 E FY 12 E EPS (`) ROA 0.91% 0.80% 1.05% ROE 20.39% 17.88% 19.97% Div Per Share (`) Div Payout (%) 15.82% 15.44% 14.51% NIM 2.70% 3.27% 4.09% Cost/Income 49.63% 54.78% 52.58% Int Expended/Int Earned 69.53% 64.02% 61.48% Credit Deposit Ratio 76.47% 77.15% 78.13% Investment Deposit Ratio 29.53% 30.24% 29.33% Advances/Deposits 76.47% 77.15% 78.12% Equity/Assets 4.46% 4.50% 5.91% Equity/Loans 6.86% 6.89% 9.03% Loan Growth 17.99% 15.26% 13.42% Deposits Growth 17.42% 14.25% 11.99% BV (`) , Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 9

10 Proposed Merger of SBBJ with SBI: Re-Rating on Cards SBI SBBJ PRICE (`) 2, BV (FY 10) 1, P/BV 2.63x 1.15x P/E 18.95x 6.03x ROE 14.80% 20.39% ROA 0.91% 0.91% Operating Profit (`in Cr) FY 10 Net Profit (`in Cr) FY 10 Equity Capital (FV `10) EPS (`) FY 10 18, , State Bank of India Amendment Bill is been cleared by GOI in Mar 2011 empowers to effectively manage the affairs of five State Bank of India (SBI) subsidiaries. SBI currently has five associate banks -- State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of Hyderabad. Among these, the State Banks of Bikaner and Jaipur, Mysore and Travancore are listed banks. SBI envisages consolidation of all subsidiary banks including SBBJ within a period of 12 to 18 months (Subject to GOI approvals). SBI merged two associates namely State Bank of Saurashtra and State Bank of Indore. State Bank of Saurashtra amalgamation took place in August 2008 while State Bank of Indore merged in August As per government the Merger of the Associate Bank with SBI is in Public Interest Ministry of Finance The consolidation is aimed at making the State Bank Group a stronger and more resilient organization. The consolidation is seen as the next logical step so as to bring in economies of scale, reduce administrative overheads, re-deploy and channelize trained manpower to business development. 201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 10

11 Sector view We expect the banking sector to be amongst the strongest performer over the next couple of years, with at least 20% credit growth for the sector as a whole, driven by strong GDP prospects, reasonable (although rising) domestic interest rates and increasing capital inflows from abroad. Loan growth is expected to be strong but rising inflation and increasing interest rates are near-term headwinds for the sector. With the economic growth picking up pace and the investment cycle on the way to recovery, we believe that growth opportunities for Indian banks are immense. In this increasing interest rate scenario, we believe margins will compress gradually. However with strong loan growth and high CD ratio banks would have higher pricing power. We expect banks with high CASA deposits and a low proportion of bulk deposits to be safe bets. Valuation We expect the bank will continue to maintain growth momentum on the back of robust growth in loans, coupled with increased thrust on high yielding assets. With the share of NPA at 1% of net advances, the bank's asset quality is better than its peers, which have NPAs of over 1.7%. At a current market price of ` 559, the bank is trading at ~6.1 times its FY10 earnings, has a P/BV of 1.15x. Furthermore, the bank has consistently declared good dividend with dividend payout ratio in the range of 15-20% during the last 5 years. Its ROE has also consistently been 18-20%% in the last 4 years making it an attractive buy after the rights issue. SBBJ s board has approved a rights issue offering two shares for every five shares held at `390 per share. Given the attractive valuations together with growth prospects of the SBBJ make the bank an Attractive Buy SBBJ is expected to continue growing at a decent pace and will also benefit from the proposed merger with SBI in the near future and a possible Re-Rating of the stock. The stock can be Accumulated within a price range of ` ` 560. At the CMP of ` 559/- the stock is available at 5.63x times its FY12E earnings. We assign a P/BV of 1.5x of Adj B/V of FY12 to SBBJ following its proposed merger with SBI and its decent growth in its business. In case of merger scenario the effective swap ratio could be in the band of 4-5 SBBJ shares for every share of SBI We Recommend Buy with Target Price of ` 890/- ~ 60 % upside from current price levels for time horizon months. 201, Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 11

12 For Any Queries please feel free to contact our Institutional Team Names Designation Id. Contact Nagji Rita CMD - - Sales Ravinder Kasliwal Head Institutional Sales ravinder.kasliwal@inveturegrowth.com /66 Dealing Shiv Damani Institutional Dealer shiv.damani@inventuregrowth.com Vinit Rita Institutional Dealer vinit.rita@inventuregrowth.com /66 Rashda Ainapore Institutional Dealer rashda.ainapore@inventuregrowth.com /66 Research Anshuman Jain Research Analyst anshuman.jain@inventuregrowth.com * 562 Divya Kant Research Analyst divya.kant@inventuregrowth.com Pankti Shah Research Analyst pankti.shah@inventuregrowth.com Sheetal Nirmal Research Analyst sheetal.nirmal@inventuregrowth.com Sanjeev Haria Research Analyst sanjeev.haria@inventuregrowth.com Sibayan Banerjee Technical Analyst sibayan.banerjee@inventuregrowth.com Ashok Patel Technical Analyst ashok.patel@inventuregrowth.com Madhu Patel Technical Analyst madhu.patel@inventuregrowth.com Disclaimer Inventure Growth & Securities Ltd has prepared this Document. The information, analysis and estimates contained herein are based on Inventure s assessment and have been obtained from sources believed to be reliable. Neither Inventure Growth & Securities Ltd nor any of its employees or associates accepts any liability whatsoever direct or indirect that may arise from the use of information herein and shall not be responsible for its completeness and accuracy. It is not an offer to sell or a solicitation to buy securities. This document is for circulation only Visit us at Please send your Feed Back to igslresearch@inventuregrowth.com Inventure Growth & Securities Ltd Corporate Office: - Viraj Tower, 2 nd Floor, Near Landmark, Western Express Highway, Andheri East, Mumbai Tel.: , Fax: , Viraj Tower, Near Land mark Building, Western Express Highway, Andheri (E), Mumbai-69 12