The P/E of 8.7x on FY16e also looks reasonable, given the mid-20s EPSg over FY15e and FY16e significantly higher than PSU peers. Our earnings upgrades of ~4% are driven by investment gains and some margin upgrades. SBI has underperformed since its May high, and that has addressed some of our valuation concerns. The earnings outlook has also improved with falling market yields asset quality issues, while still persistent, have not worsened.
Incremental stress on asset quality is peaking, although recoveries and the actual impact on credit costs could continue into FY16e due to the PCR catch-up. SBI has also consolidated its mid-corporate book in recent quarters and is in a good position to benefit from a recovery. SBIs relatively low exposure to restructured loans makes it stand out among PSUs. We prefer SBI to most other PSUs because of its strong deposit and capital base.