Tata Tea
Cluster: Apple Green
Recommendation: Buy
Price target: Under review
Current market price: Rs853
Eyeing Snapple
Key points
- As per media reports Tata Tea is bidding for the Snapple range of fruit drinks, diet drinks and iced tea coming from the portfolio of Cadbury Schweppes.
- Cadbury Schweppes, which makes a range of soft drinks and confectionary including Dairy Milk chocolate, Trident chewing gum and Snapple juice drinks, is in the process of spinning off its US beverage unit.
- If Tata Tea is successful in acquiring Snapple, the brand would stimulate growth in its stagnating black tea business.
- Till further clarity emerges on the revenue potential and profitability of Snapple as well as the structure of the Tata Tea-Cadbury Schweppes deal, it is difficult to form an opinion on how this deal may affect the performance of Tata Tea's stock price.
State Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,780
Current market price: Rs1,525
Price target revised to Rs1,780
Key points
- The Reserve Bank of India (RBI) has announced that it is going to transfer its 59.7% holding in State Bank of India (SBI) to the government for Rs35,530 crore on June 29, 2007. The transaction is revenue neutral for the government, as the RBI would declare a special dividend of a similar amount to replace the amount paid by the government for the stake sale.
- The SBI management has said that the bank will require to raise Rs15,000 crore of capital in FY2008; of this Rs6,000 crore is likely to be in the form of equity and the balance as debt.
- The current guidelines restrict SBI from diluting the promoter's stake below 55% and this would hinder the bank's capital raising plans. Hence the management is of the view that the follow-on offer would take place after the amendment to the SBI Act, most probably in December 2007.
- SBI has plans to consolidate its insurance and asset management businesses into a separate non-banking financial company (NBFC). It also plans to sell a 10% stake in the NBFC to three to four investors and intends to list the arm in FY2009. All these would be significant value drivers going forward. The chairman of the bank has stated that he expects the valuation of the life insurance business to be around Rs28,700 crore ($7 billion) while we have valued the same business at Rs23,800 crore ($5.8 billion). Our valuation is lower considering the roadblocks that the bank is likely to face while unlocking the value in these investments, just as ICICI Bank is facing now.
- After providing for the AS-15 impact (Rs900 crore of extra provision per year from FY2008-12) our earnings estimates for FY2008 and FY2009 have reduced by 4% each. We have also introduced our FY2009 estimates. Based on the current market price of Rs1,525 the stock is currently trading at 13.9x FY2009E earnings per share (EPS), 1.9x FY2009E stand-alone book value of Rs813 and 1.4x FY2009E consolidated book value of Rs1,061. The stock has run up 54% in a span of the past three months. Hence in the near term there could be some profit booking and consolidation. However, we believe the bank has entered a sweet spot as a host of policy changes in the banking sector and for SBI could unlock significant value in the stock in the medium term. We maintain our Buy recommendation on the stock with a revised twelve-month price target of Rs1,780