>INDIA STRATEGY (MORGAN STANLEY)

Model Portfolio & Focus List: Adding State Bank of India

• Changes to Focus List: We are adding State bank of India (Rs1,799) to our focus list. Our banks analyst Mihir Sheth argues that with the macro environment improving, SBI’s loan growth and asset quality are set to improve.

• He believes that NIMs will bottom out in F2Q10 and will start expanding significantly on account of re-pricing of high cost deposits and an acceleration in loan growth. The improvement in capital and credit markets will ease the asset quality concerns thereby aiding SBI’s key borrower segment – the corporate sector.

• SBI is gaining market share versus private players in terms of fee income generation and its subsidiary performance (including insurance) has remained strong. We believe this will provide further support to earnings and valuations.

• After taking an increase of 125% in credit costs in F2010, SBI still generates an ROE of 16% which is attractive in Mihir’s view. SBI trades at 1.8x book, 11.8x P/E – a significant discount to private banks and the market. He believes this will likely narrow as core earnings momentum returns.

• We fund this change by removing Union Bank (Rs213) from our Focus List which has been a relative outperformer.

• We are not making changes to our sector model portfolio which remains biased for a recovery in economic activity. Thus we are backing infrastructure and consumer discretionary sectors while remaining underweight in materials. We remain neutral financials.

To see full report: INDIA STRATEGY