In relation to SBI Merger, are fewer and bigger PSU banks better?


Public Sector Banks (PSBs) are banks where a government holds a majority stake i.e. more than 50%. Currently, there are 27 public sector banks in India. Out of these, 21 banks are nationalized and 6 banks are of State Bank Group (SBI and its 5 Associates) and the shares of these are listed on the stock exchanges. In India, out of the total banking industry, the Public sector banks constitute 72.9% share while private players cover the rest. However, PSBs seem to be losing their market share on account of the huge Non-Performing Assets. Banking industry is undergoing unprecedented changes driven by consolidation by means of mergers and acquisitions all over the world. In recent years, banking industry of India has witnessed a transformation as it was working in highly regulated environment before.

L= Listed; UL= Unlisted


The objectives of the study are:

  1. To analyze the impact on share prices of the company during pre and post-announcement period of the merger.
  2. To see the resulting change in the value of the company after the merger.
  3. To study the synergy effects of the merger
  4. To analyze whether the mergers add value to the Indian Banking System in general and Public Sector in particular.



As on March 31, 2017, the firm was undervalued even after the merger and increase in share prices. The rise in the share price was not huge and keeping the stock of SBI as undervalued.

We have use FCFE method in calculation the value of Firm.


  • The company is expected to grow at a high growth rate for 3 years. (SBI sees profit boost in 3 years after merger).
  • Growth rate of the firm is constant at 4.794%; it is calculated by growth in deposits of banking sector deposits.

Free Cash Flow To Equity= Profit After Tax – Capital Expenditure – Increase in working Capital + Debt Raised – Debt Repaid + Non Cash Expense

Before merger to calculate FCFE the sum of SBI with all the associates and BMB have been taken before merger so as to reduce the impact of errors.

Capital Asset Pricing Model (CAPM)

CAPM= Risk free Rate of Return +Beta (Market Return – Risk free Rate of Return)

Here, we have take 10 years monthly average of the Government of India Bond return for % years, which comes out to be 7.91%. (Annexure 1)Sensex average monthly return for 5 years comes out to be 11.889% (Annexure 1) and Beta of SBI is 1.3871 (Capitaline)

CAPM= 7.91%+ 1.3871 (11.889%-7.91%)


It is assumed that CAPM is the Present Value Factor and cost of equity of the firm.



Terminal value =

= 345049.4575

PV of Terminal Value = 345049.4575 X 0.60= 208442.968

Value of Firm = 284733.8107


For market value of the firm we have taken the data as on March 31, 2017, the closing price of SBI and the number of total outstanding shares on that date.


Value of firm – Market value  = 284733.8107 – 233862.8853

= 50870.9254


The company came out with Swap Ratio by analyzing three-weighted method in finding out the true value of its associates and making it a fair deal.

Three methods, which are, used are-

  • Market price method- It refer for determining the price of the similar items for determining the value of an asset. It is a business valuation method for determining the value of the business ownership. The weightage that was given to this method at the time of merger was 45%.
  • Completed Contract Method (CCM)- In this method, it enables the businesses to postpone their reporting of income and expenses until the contract is completed. This method can either under estimate the profit or over estimate it as there are contracts, which are not being accounted for till they are completed. The weightage given to this method is 45%.
  • NAV Method- This method focuses on the NAV of its total assets minus total liabilities divided by number of outstanding shares of the firm. This method was given a weightage of 10%.

The valuation of the company is done on the market value of firm as on 17 March 2017. The company came out with the Exchange rate of 2.8:1 for SBBJ, 2.2:1 in case of SBM and SBT. There was no Swap ratio for SBP and SBH as they were fully owned subsidiary of SBI and 4,42, 31,510 shares for every 100 crores shares of BMB.

(SES Governance)


Fixed Assets

The fixed assets of SBI went up to Rs. 51,884.15 crores post the merger from Rs.16,200.90 crores pre-merger as all the fixed assets of the associate banks merged with that of SBI converting it into a larger public-sector undertaking in terms of assets. The major increase in fixed assets was because of increase in Premises of SBI from Rs. 6,505.14 crores to Rs. 42,107.57 crores. After the merger, SBI joined the club of top 50 banks globally in terms of size of assets. The number of branches increased to around 24,017 and ATMs managed by SBI was nearly 59,263 across the country. This will increase the area managed and covered by the bank directly rather through its associates with a wide range of products at lower costs.

Net Profit and NPA’s

The net profit of SBI pre-merger was reported to be around Rs. 12,743.39 crores which was converted to a net loss of Rs. 390.67 crores post the merger due to integration of non-performing assets of SBI with all its associate banks. The NPA’s were reported to be at Rs. 57,155.07 crores compared to Rs. 38,024.06 before the merger. NPA’s of SBI increased by almost Rs. 19,131 crores which resulted in a great loss to SBI.

Out of all the associate banks, SBP had the largest amount of NPA’s of Rs. 2,924.03 crores and a net loss of Rs. 972.4 crores before the merger. While SBH reported the highest net profit of Rs. 1,064.92 crores with negligible NPA’s among all the associate banks. However, the loss incurred is of short-term nature and gradually with time, SBI will again start reporting profits as a result of economies of scale and reduction in costs of doing business.


On the date of the merger, markets were bullish on SBI and its associate as SBBJ shares price rose by 20% for two consecutive days hitting the circuit on both days. SBM’s share prices also rose by 20% after the announcement of merger following a growth of 15.74% on the next day. In fact, SBT’s share too rose by 20% after the announcement of merger and further by 15% on the following day. SBI owns a market share of 23.07% in deposits and 21.16% in advances as opposed to 18.05% and 17.02% in deposits and advances respectively.

The combined bank now caters to around 42 crore customers. There exists a large scale of inefficiency among smaller banks which when merged into a larger bank would make it more efficient in carrying its operations.


Post-merger, the total customer base of the bank has reached 37 crores with a branch network of around 24,000 and nearly 59,000 ATMs across the country. The employees’ strength of SBI has increased to a total of 2,71,765. All the customers and employees of SBI associate banks have become the customers and employees of SBI. So, all the employees are now eligible for the same retirement benefits as the SBI employees. That means, the SBI employees get three retirement benefits i.e. provident fund, gratuity and pension and the associate bank staff members get two retirement benefits.

The merged SBI Bank now has a deposit base of more than Rs 26 lakh-crore and advances level of Rs 18.50 lakh crore. The board of SBI approved the merger plan under which SBBJ shareholders would get 28 shares of SBI for every 10 shares held. For both, SBM and SBT shareholders would get 22 shares of SBI for every 10 shares. However, separate schemes of acquisition for State Bank of Patiala and State Bank of Hyderabad were approved by SBI. Since they are wholly owned by the SBI, there will not be any share swap or cash outgo and for BMB, SBI’s 4,42, 31,510 shares for every 100 crores shares of BMB

Apoorva Goenka
Team Leader- Equity Research & Valuation
(MSc Finance, NMIMS Mumbai. Batch 2018-20)

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Industry Focus – Diving into a segment of The Equity Market – The Battery Segment


Batteries are going to be the picks and shovels of the future business that are data driven and electrified. 5 years from now the electrical grid is going to be materially different compared to what we have today and the electrical vehicle business is going to be robust. There is increasing demand for batteries and their primary element the lithium ion. Essentially it uses the element lithium ion, to capture electrical particles and turn them to useable power.

Over the course of the next 5 years the battery segment it is well poised to grow at the rate of 10 to 15 percent sustainably over the next 10 years. In terms of where we are seeing this, different companies are tying up and recognising the importance of batteries – in June 2018 GM and Honda announced a partnership that Honda is going to buy battery modules from GM as they are looking for better performance and longer range. Like how the transportation segment revolved around the “fuel economy”, in the coming years the move is towards the “battery economy”. The better you make a battery, the better you can make an electrical vehicle – and the same is true for anything that has battery at the heart of it – data centres, grid, or even a corporate head quarters (where a lot of data is stored, power is required and the electric generator that is used are powered using advanced batteries). This is all a part of a much bigger movement, to make an effective and efficient use of electricity and how we do business in the future.

Leading up to today we see more demand for smart phones, stationary storage is catching up, but the EV’s are going to be the drivers of demand of battery (Goldman Sachs projects about 55% of the lithium ion battery market will be controlled by EV in 2020). Batteries are going to emerge as a really important part of the economy for both energy production and transportation.

What exactly is a battery?

The simplest definition can be that it is a device that is able to store electrical energy in the form of chemical energy and convert that energy into electricity. There are different chemical substances in the battery, which then exchange electrons across the battery cell which then exchange energy. The main components are the cathode the positive terminal of the battery, the anode the negative terminal of the battery and the electrolyte. The electrons flow from the anode – the negative terminal of the battery, towards the cathode – the positive terminal of the battery creating a closed circuit.

The most popular battery for all application today is the lithium-ion battery. The lithium is the martial which is in the cathode, used to exchange electrons across the system.

The lithium ion battery has become the default go-to for battery manufactures. First of all there is a fair amount of lithium available; it is very light and thin. It can hold its charge, for a substantial amount of time when compared to the lead acid or the classic alkaline battery. When you charge a lithium ion, you can be fairly secure that the charge you put in, most of it is going to stay there. The classic alkaline battery is not rechargeable, and the lead acid battery which is rechargeable, but requires constant recharging as it discharges easily.

The next question that arises is the availability and the production of lithium which can be in 2 ways – from Brian ponds predominantly from South America – Chile & Argentina. The second is from mineral rocks predominantly from China, Australia, Portugal and Zimbabwe.

The lithium is extracted through normal evaporation from Brian pond as it is the cheapest and the simplest way, but it can be time consuming. When mining it from mineral rocks, there is higher concentrated amount of lithium but it is more expensive and has environmental impacts.


China wants to push toward cleaner energy, due to their air condition and their population. They   have weak supplies of hydro carbons such as oil or natural gas and are depended heavily on Russia and the Middle East for oil, but have a robust lithium reserve, dominating global markets. In home market lithium ion is key for EV, as it vital for them to have large amounts of native production.

China has a huge reserve of lithium; most of it is in the form of mineral rocks, for producing lithium. Several native Chinese companies are using this to their advantage and making their names in the lithium ion business. Tianqi lithium recently paid nearly $4.3 billion, to become the second largest share holder in Chile’s SQM mining company one of the largest lit aggregators and producers of lithium in the world.

China very well positioned, having a controlling stance over lithium by making investments in South America and Australia and get a big bite out the market outside China as well. They have not dived into their own reserve, as they have locked up supplies elsewhere.

Being the largest consumer of lithium as well as the producer, China really controls both the demand side as well as the supply side.

Cobalt is a very important component for a battery; it helps in maintaining the longevity, stability and safety of the battery. If we reduce the level of cobalt in the battery, we need to increase the level of nickel, which increases risks of overheating and fires. It is expensive and expected to increase in demand between 10 and 25 times from current levels by 2030 with over 50% of the demand coming from battery segment. About 2/3 rd of the global supplies comes out of Congo.

Again when it comes to Cobalt, China has a significant position controlling 8 of the 14 largest miners in the Congo. China also accounts for 80% of the production of cobalt related chemicals, the chemical required to take the metal of the ground refine it and make it useable for the battery. China’s position in cobalt and layering it on lithium, locks-in both the supply and the demand side for the lithium ion battery.

As we look at different ways to produce cathode to go with lithium anode there is a strong interest in moving away from the strong holds that China has built up reserves around. Anode is predominantly graphite, which by surprise China had around 65% of the global production in 2017. Of the cathode and anode side, China had a major presence.

In the anode side, there have been explorations, works have been going on to replace graphite with aluminium, as it can hold more lithium, but any of these technologies have not reached commercial scale right now.

Important take away from the macro perspective is that as we look out in the battery market in the next 3-5 years, it’s going to run through China.

The leading EV battery formula that’s being used right now – nickel-manganese-cobalt-oxide cathode, China controls 57 % of their production. When it comes to the significant control of the inputs lithium, cobalt, when it comes to the refining capacity of the cobalt, they have 80 % of that capacity. On top of that, having a majority share of manufacturing of the cathodes that go into the manufacturing  of lithium ion battery and over about 40% EV demand (source: IEA), IEA is projecting for China to control by 2040. When you are controlling all the steps in the value chain, from the rock coming out of the ground, all the way down to an EV driving of the lot, at least in the near term China is going to have a very important role to play.

Indrajith Aditya
Team Member – Equity Research and Valuation
(M.Sc. Finance, NMIMS – Mumbai 2018-20)


A Company Analysis Report

Asian Paints Ltd., the leader of the Paint & Varnish industry trading at CMP 1400 (as on 07/02/2019) has been one of the most attractive script for the investors. Despite being trading at a Price-to-Earnings Ratio of 69.45 (whereas industry’s P/E is 44.72), the investors and broking houses are bullish about the performance of the market leader of the Paint & Varnish Industry. Having seen the performances and investors’ action against the traditional market policies over the past few years makes Asian Paints an interesting case to analyse.


Asian Paints Ltd. is one of the most prestigious company which has been present in the market for over 75 years and having a group revenue of over USD 2.5 billion p.a. Built on the principles of providing a distinct service of paint solutions and kitchen & bath segment through constant innovation & diversification. The company works towards providing exceptional spectrum of Inspiration-Customisation-Execution service to its customer base. The company is the largest supplier in the market having nearly a significant 55% of the market cap of the country due to its conscious effort of building customer relations over the years.


Asian Paints has been able to capture more than half of the market over the years. The direct competitors for Asian Paints in the market are Berger Paints India Ltd, Kansai Nerolac Paints Ltd & Akzo Nobel India Ltd. However, none of the companies has achieved the scale & diversity and the market cap as Asian Paints has over the years. The whole of Paint Industry has witnessed a steady cumulative growth of 7% Y-o-Y over the course of last 5 financial years. While Asian Paints has been able to outperform the industry and has posted a significant 10% Y-o-Y growth in the similar period surpassing the global growth trend as well as Indian growth trend of 3.7% and 6.9% respectively. With the kind of economic and infrastructure growth and development the country has been witnessing over the years which has laid the platform of the scope of development and prospect of future opportunities. This has provided a positive outlook to the industry as a whole.


The company’s product profile is mainly made up of paints & home improvements. It majorly consists of interior & exterior paints, wood finishes range, wall coverings, SmartCare waterproofing products, bath fittings, kitchens and wardrobes. Rainwater harvesting and water conservation schemes are also an area company is looking to expand on. The company has installed capacity of 12 lac KL p.a. in a total of 9 factories across India. Asian Paints has a very diverse consumer base ranging from housing homes to automobiles to hospitals to factories to corporates across the length and breadth of the country leading to large product portfolio. Asian Paints has separate store network in town to cater to their demands, flagship multi-category décor stores as well as dealer run painting service to provide the bouquet of products and services up on offer. The company has its presence on Global level with mergers with PPG Industry Inc, USA, Berger-Asian in the South East Asian countries, as well as newly acquired tie-ups in Sri Lanka, the Caribbean nations & Africa.


There are two huge factories being set-up by the company in Mysuru & Visakhapatnam with a combined installed capacity of 11 lac KL p.a. This is a clear positive indication by the company about their future plans and growth prospects. In the recent financial year out of Rs. 1350 crs of CAPEX, Rs. 1100 crs was attributed to set-up of these new plants. Being the flag bearer of the industry, the company focusses on providing premium paint solution through constant innovation via new technologies, innovation & solutions and that has been seen through growth of Research & Development. Dream home concept, Colour ideas, personalised virtual home re-imagined solution on the electronic devices with technical assistance are the ways company has imagined and planned to moving ahead in the period.


  • Asian Paints, being the market leader is setting trends and benchmarks for the other companies. The company with all its expansion and diversification plans combined with the future opportunities is expected to grow at a rate of approx. 12% p.a.
  • The Goodwill and reputation earned by the company in the market over the years is been reflected in its ability to maintain a highly efficient working capital cycle which indicates that it has been able to negotiate the deals and form credit policies effectively leading to quick conversion of cash back into the company. This trend is expected to be continued in the upcoming years and the net cycle is expected to be near 15 days.
  • Despite of the expansion and diversification in the recent years and the plans for the upcoming years which has seen a large amount of capital expenditure being incurred, the Fixed Assets turnover ratio is expected to tick on the positive side marginally at 5.5 because of the company’s ability to generate the additional sale from the increased expenditure.
  •  Asian Paints has both secured as well as unsecured loans though of nominal amount. The interest cost hence incurred is negligible which allows the company to plough back its profits either to its shareholders or back into the business and are not flown out of the business.
  • The company as it seems won’t be in need of additional funds either in form of equity from the shareholders or as debt from other financial institutions. At the projected rate with the current capital, Asian Paints will be able to double its current Reserves & Surplus as well. 
  • The Operating Expenses are assumed to be constant going ahead and no major change is expected in the current levels of expenses.
  • The company has a huge amount of Cash reserves and surplus which can be used going ahead in the future which can be an alternative for external debt or dilution of shares when the need arises. The cash at hand consolidates the company’s strong position in the market and industry.


Asian Paints as the flag bearer of the industry and as benchmark standards have taken many steps in order to optimize cost and use of the resources. Measures such as reduction in specific electricity consumption, use of non-product fresh water consumption, water replenishment, reduction in specific hazardous waste disposal and electricity from renewable sources have been taken up by the company.

Asian Paints Ltd. has seen its share price almost doubled over the course of five years beating the benchmark average of Nifty 50. The company has seen a hike in the share price Y-o-Y in all the previous years. This has set a positive outlook for the upcoming years as well.

The company has revenue growing at Y-o-Y at a CAGR of 11%. This trend is expected to increase in the upcoming years with new opportunities in the current segment of the company with the expected revenue to grow at a much better rate which has been seen the results of first 3 quarters of FY 2018-19.

The EBITDA margins has seen a rise over the years and are expected to maintain and further continue this trend upwards till 18% which in comparison to the industries is pretty healthy. This indicates that the company is operating in a systematic manner over the years and is been able to replicate its performance despite of some uncertain events.

The company is quite comfortably able to churn the Operating Profit (EBITDA) into Shareholder’s earnings (PAT). This in turn indicates that the funds deployed by the shareholders are effectively been converted back to profits on a consistent basis which trend looks set to continue in the near future as well.

The Earning per Share of the company has increased over the period in line with the Sales of the company indicating that the rise in revenue is been reflected in the Net Profit. The company has even paid a fair share of this earning back to the shareholders in the form of dividends constantly.              

Asian Paints Ltd has had the highest P/E ratio in the industry throughout the years and still has managed to grab the investor’s interest over the years due to its fragile strength and capacity to dominate the current market with the Y-o-Y return generating capacity with the security of the investor’s funds. Hence commanding a huge premium on its price.

Asian Paints has been constantly able to generate a very high Return on the Shareholders funds deployed by them. An increasing trend in this percentages shows the efficiency of this almost debt-free company which is able to return the large chunk of profits back due to presence of negligible amount of debt on their books of accounts.


The fact that the company has been highly overvalued as on date by almost 270% as per projections and still is a hot-pick amongst investors and broking houses is well justified by its financial results and future prospects. With the real estate development, road network development, The SmartCity Project, Rural development combined with the Pradhan Mantri Awas Yojana (2024), Housing for all scheme and many more upcoming projects opportunities, Asian Paints being the market leader of the industry is expected to have a potential exponential comparative growth in the upcoming years ahead. The company also has a good dividend track report and has consistently declared significant dividends for the last 5 years providing the investors with return back year-on-year combined with the capital appreciation has led to a return greater than the market return.

Dhrumil Wani
Team Leader – Equity Research & Valuation
(M.Sc. Finance, NMIMS – Mumbai. Batch 2018-20)

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