ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,020
Current market price: Rs860
Life insurance—the key driver
Key points
- We have raised our price target for ICICI Bank to Rs1,020 primarily due to the improved valuations commanded by its life insurance subsidiary and the expected improvement in the return on equity (RoE) post-FY2008, which should help the core banking business get better valuations.
- We expect ICICI Bank to generate a 13-15% RoE and a 24% earnings per share (EPS) compounded annual growth rate (CAGR) over FY2006-08E. Considering its unique positioning as the largest Indian bank with a leadership or second spot across all the financial services business verticals, we believe the stock is trading at attractive valuations. Based on the current market price of Rs860 the stock trades at 19.5x its FY2008E EPS, 9.8x its FY2008E pre-provisioning profit and 2.8x its FY2008E book value. The valuation of all its subsidiaries, joint ventures etc works out to Rs297 per share of which the life insurance subsidiary alone contributes Rs252 per share. We maintain our Buy recommendation on the stock with a price target of Rs1,020.
SECTOR UPDATE
Banking
CME base to increase for banks
The Reserve Bank of India (RBI) in its FY2006 mid-term review of annual policy statement had announced that the prudential norms prescribed for capital market exposure (CME) of banks would be rationalised in terms of base and coverage. The RBI has tried to address the following key issues in its revised draft guidelines on the banks' CME applicable with effect from January 1, 2007.
- RBI wants to shift the risk arising from CME: Currently, the banks' CME is restricted to 5% of their total outstanding advances as on March 31 of the previous year. With the revised guidelines coming into effect the CME can go up to 40% of the net worth as on March 31 of the previous year. By adopting this approach we feel the RBI wants to shift the risk exposure of the banks from being a function of loan growth to the one that is linked to their profitability. As is evident from the table provided below, all leading private banks stand to gain from the new guidelines. The banks which have sound internal controls and a robust risk management system have been provided further leeway with the option of a higher exposure.
- RBI wants to curb unwanted leverage in the capital market: The RBI has tried to plug some loopholes from where it feels the money is slowly but surely trickling down to the secondary and primary markets. The banks have been asked to be more vigilant before granting loans against capital market instruments and ensure that people are not borrowing from multiple banks. RBI has also asked banks to make borrowers submit a declaration about their overall borrowings against capital market instruments.
- Retail IPO finance market to be hit: The move from the RBI looks more likely to curb the huge over-subscriptions in the recent initial public offerings (IPOs). Retail IPO finance market would be affected but it would also lead to better allotments in the retail category. It also tries to address the problem of a steep and significant correction, as witnessed in May-June 2006, partially aggravated by a cascading effect caused when the banks start liquidating securities to reduce the leveraged position of the borrower.
- Monitoring of intra-day exposures: Currently there are no explicit guidelines for monitoring banks' intra-day exposure to the capital markets. However, the RBI wants that the respective boards of the banks should have fixed intra-day limits and should monitor the same on an ongoing basis.
VIEWPOINT
Matrix Laboratories
Investor should avail of the open offer
DSP Merrill Lynch Ltd (on behalf of MP Laboratories [Mauritius] Ltd and Mylan Laboratories Inc—the acquirer of Matrix Laboratories Ltd) has announced the revised schedule for the open offer for Matrix Laboratories Ltd shares. The open offer starts on November 22, 2006 and closes on December 11, 2006.
Maylan Laboratories Inc (Mylan), subsequent to its acquisition of the 51.5% stake in Matrix from the private equity players, has already proposed to buy up to 3.08 crore voting equity shares of Rs2 each of Matrix Laboratories, constituting 20% of the equity, at a price of Rs306 a share payable in cash.