Stock Review: State Bank of Bikaner and Jaipur’s (SBBJ)

State Bank of Bikaner and Jaipur's (SBBJ) rights offer appears attractive for existing shareholders, as they can earn a return of close to 13% on their additional investment. However, it would not be profitable to make any fresh investment in the counter at the prevailing stock price.

To augment its tier-I capital base, the Rajasthan-based bank's board approved a rights issue of . 780 crore, featuring an offer for two shares for every five existing shares at 390 per share.

Once the new shares are listed, the bank's earnings per share will be diluted by 28.6% to . 75.7. Based on its Tuesday's closing price of . 617.8, the scrip is trading at 5.8 times its trailing twelve months, earnings. Its peers such as State Bank of Travancore, State Bank of Mysore and Bank of Maharashtra are trading at similar valuations. To retain the current valuation, the SBBJ scrip is expected to fall to around . 440 after the rights offer. This would still be at a premium of over 13%, or . 50, more than the rights issue price.
There would be no dilution in percentage stakes if all the existing investors apply for the rights issue. Its parent State Bank of India controls a stake of 75% and is likely to buy the shares at the discounted price to improve the equity capital base of its subsidiary. In case the other shareholders don't opt for this, the relative shareholding of the non-promoter group in the bank will come down by 5.8%.

For the nine-month period ended December 2010, the net interest in-come of the bank rose by 47% year-on-year and net profit went up by 26%. With the share of NPA at 1% of net advances, the bank's asset quality is better than its peers, which have NPAs of over 1.7%.

It makes sense for the shareholders to opt for the rights issue, given the attractive return. However, itwill not be attractive to buy the shares now to participate in the rights issue since this might result in a loss of 20% on overall investment.