A company is said to be ‘fundamentally strong’ when it portrays a specific set of characteristics, viz, strong and consistent financials, lower leverage ratios, etc.
Listed below is one such fundamentally strong bank stock that one should add to their portfolio for a potential upside of more than 30 percent:
State Bank of India
With a market capitalization of Rs 5.06 lakh crores, the stocks of State Bank of India (SBI) are currently trading at Rs 568, slipping around 0.70 as compared to the previous closing levels of Rs 571.25 apiece. The bank has a decent dividend yield of around 2 percent.
The bank’s stock exhibits signals of an “undervalued” one since its price-to-earnings (P/E) ratio is 7.62 which is way less than the P/E ratio present in the banking industry, i.e., 13.85.
Digging into the financial numbers reported by the bank during the recent quarter periods, the total income levels have slipped from Rs 1.36 lakh crores during Q4FY22-23 to Rs 1.32 lakh crores during Q1FY23-24.
On a contrasting note, the bank, due to efficient cost management and increasing interest income, has seen a marginal jump in net profits during the same period from Rs 18,343.25 crores to Rs 18,735.95 crores.
The basic profitability ratios of the bank such as the return on equity (RoE) as well as the return on capital employed (RoCE) have consistently improved with the most recent movement in the former from 13.61 percent during FY21-22 to 18.44 percent during FY22-23, and, the latter moving up from 8.77 percent to 12.46 percent.
Coming onto the bank-specific ratios, the net non-performing assets (Net NPA) of the bank have reduced from 1.02 percent during FY21-22 to 0.67 percent during FY22-23. Moreover, the net interest margins (NIMs) have seen growth from 2.69 percent to 2.93 percent keeping the timeframe the same.
HDFC Securities recently covered the banking stock and gave a ‘Buy’ tag with a target price of Rs 790 indicating a potential upside of 39 percent as compared to the current prices prevailing in the market.
The investment rationale behind providing such a recommendation pertains to the ‘YONO’ flagship app emerging as India’s largest neo-banking channel, in-house DSAs, and improving overall economics for the bank.
According to the latest shareholding pattern, the Promoters of the bank hold a 57.49 percent stake, and the Foreign Institutional Investors (FIIs), increasing their stake recently, currently hold a 10.72 percent stake in the bank.
Headquartered in Mumbai, the State Bank of India (SBI) is a public-sector banking and financial services provider. It serves customers through retail & commercial banking, forex, agricultural/rural banking, tech banking, etc.
Written by Amit Madnani
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