Brokers put a 'buy' on SBI rights issue plan

MUMBAI: The employees of State Bank of India might be considering themselves lucky for being eligible for stock options shortly.

Brokerages have given a thumbs up to the bank’s proposed rights issue that has been priced at a 35% discount to the market price. It is expected to hit the market in the next couple of months.

And though March is a tough month as far as liquidity is concerned (due to advance tax commitments and accounting considerations), most players expect the mega-issue to sail through without a hiccup.

Foreign brokerages like Merrill Lynch and Citi have already come out with buy reports on the bank after factoring in the mega rights issue, which is believed to be second only to ICICI Bank’s follow-on issue of Rs 20,000 crore.

SBI, India’s largest bank, has proposed to raise Rs 16,736.31 crore by way of a rights issue in the ratio of 1:5 (one share for every five shares). The issue has been priced at Rs 1,590 per share. On Thursday, SBI lost marginal ground to end at Rs 2,418.60.

“We believe the risk-return remains positive post rights even after factoring in the slightly higher dilution at 20%,” says Merrill Lynch. According to the brokerage, it would provide the bank with the requisite capital to capitalise on growth opportunities, especially in capex and infrastructure segments. The rights issue is likely to be completed during FY08, it adds.

Citi feels that the bank could use the new capital to almost immediately plug its pension liability hole. “If so, (it) would absorb over a third of the new capital, offset at balancesheet level and would limit Tier 1 increase to under 10%,” it adds.

Market players have also negated fears that timing of the issue may play spoilsport. The bank has fixed February 4 as the record date for the rights issue, which is expected to hit the market in March when tax payments take centrestage.

“A stock like SBI won’t face any difficulty especially when offered at such a discount,” said a senior official at a domestic investment bank. “Even if it comes in March, it will find enough takers. Shareholders will make adequate provisions to invest,” he adds.