SBI, ICICI still at discount to SOTP valuation

Even as the stock market is witnessing a rally of sorts for past few trading sessions, a sum-of-the-parts analysis of leading domestic companies reveals that most of them are still trading at a discount.

Out of the total 14, most of the companies, whose stock prices are not only driven for their position in the core business, but also for the strategic stake in other unrelated and diversified business, are available at a discount to their intrinsic value based on estimates by various brokerages. To be precise, nine out of the total 14 are trading at a discount –marginal or steep--to their sum-of-the-parts valuation. However, four companies are trading at a steep discount of around or above 20%. Three of these are in the banking and financial services space as though they have gained more than 20% in the past 15 days, they are still down by over 50% year on year.

In order to analyse large and diversified businesses, individual businesses are broken down and valuations are arrived at differently depending upon the company’s competitive position and applicable premium or discount as compared to peers. This method of calculating the valuation by summing up the valuation of various businesses and arriving at the target prices is termed as sum-of-the-parts (SOTP) method.

14 such companies including Grasim Industries, Sterlite Industries, ITC, Larsen and Toubro, Mahindra and Mahindra, HDFC, Hindalco, Reliance Industries, Kotak Mahindra Bank, Jaiprakash Associates, State Bank of India, ICICI Bank, Aditya Birla Nuvo and Reliance Capital.

Going ahead, market participants are bullish on select banking and financial services companies and expect further rise in their prices. Larger players like SBI, ICICI Bank, Kotak Mahindra Bank, Reliance Capital and HDFC have higher chances of upsides with overall improvement in the market. These give good entry levels for investing in the long term, say analysts.

Company name	Current price	SOTP	% chg
Aditya Birla Nuvo****	450	932	-51.72
Reliance Capital***	371	500	-25.80
ICICI Bank	385.5	471	-18.15
Kotak Mahindra Bank**	300.7	365	-17.62
HDFC	1580	1675.5	-5.70
Larsen and Toubro	674.3	707	-4.63
Reliance Industries	1541	1582.5	-2.62
Jaiprakash Associates	89.3	90.5	-1.33
Mahindra and Mahindra	386	390	-1.03
Sterlite Industries	373	353	5.67
ITC*	186.55	172	8.46
Hindalco	55	50	10.00
State Bank of India	1127	900	25.22
Grasim Industries	1601	1270.5	26.01

* SOTP as on Feb 18' 09, ** SOTP as on January 24' 09

*** SOTP as on Jan 20' 09, ****SOTP as on Oct 24' 08

Other SOTPs as of March'09

Source: Prices (BSE), SOTP (Brokerage reports)