Sharekhan Valueline

Valueline Hindi

Valueline Gujarati

Bank of Baroda - FPO

Attractive Price/Book Value

However, profitability ratios need to improve to help the scrip get the rightful P/BV multiples

Bank of Baroda (BoB) made its maiden Rs 850-crore public issue in 1996. The government of India (GoI) currently holds 66.8% of the pre-issue paid-up equity share capital (Rs 293.27 crore), which will come down to 53.8% after the issue. On September 2005, it had 2,694 branches in India and subsidiaries in 19 countries, serving over 2.5 crore customers. International operations account for 16% of its business (deposits + advances) and domestic operations the rest.

The main objects of the follow-on offer include augmenting the capital base. On September 2005, BoB’s capital adequacy ratio (CAR) stood at 12.8% as against the Reserve Bank of India (RBI)-stipulated 9%. The bank intends to take advantage of the domestic economic boom and expand its international presence. BOB plans to become a universal bank with foray into insurance, mutual funds and stock- brokering. But these are currently only under consideration and actual implementation would take time.

Strengths

BoB was the first among PSU banks to take the initiative of brand building and completely overhauling the PSU banking culture. It started the 8-to-8 banking, unheard of among PSU banks.

Though slow to implement technology in its operations, BoB has made significant advances in this area. It has implemented a single technology platform, which will aid in rolling out its core banking solution in all its domestic and foreign branches. The multi-currency and multi-regulator compliant system will provide seamless integration of operations across all its branches. The technology cost will continue to weigh heavy on the cost to income ratio (54% as on September 2005), which is at the higher end among its peer group. However, the system will provide compounding benefits in the bank’s business in the years to come.

Credit growth has remained healthy at 31% in H1 FY 2006 over H1 FY 2005, with the credit-deposit ratio (CDR) at 60%. The numbers are expected to improve in the busy season ahead. The net interest margin (NIM) of 3.37% in H1 FY 2006 is considered healthy in the banking sector. As on September 2005, 85% of the funds were deposits. Of this, 38% were low-cost deposits, resulting in one of the lowest cost of deposit, at 4.24%, in the banking industry.

Weaknesses

Treasury income made up over 50% of the `other income’ (OI) category, which has been languishing in the absence of treasury gains in a rising interest-rate scenario. The fall in treasury gains has been significant and it needs to be substituted by core lending income. But this will take some time.

Its return on net worth was low, at 12.7%, in FY 2005 and 14.46% in H1 FY 2006.

Valuation

In H1 FY 2006, BoB’s net interest income witnessed a growth of 12% to Rs 1540 crore. OI fell by 31% to Rs 518 crore on a 63% fall in treasury income to Rs 140 crore, from Rs 375 crore in H1 FY 2005. The 63% fall in OI weighed heavily on net profit, which registered a fall of 18% to Rs 416 crore.

The scrip currently trades around Rs 245. The last one-year, six- and three-month average price of the scrip stood at Rs 222, Rs 239 and Rs 233, respectively.

BOB’s annualized EPS for H1FY06 on post-IPO equity works out to Rs 22.8. Considering the higher price band, post-IPO book value (BV) is Rs 203 and adjusted book value (ABV) is Rs 188. At the price band of Rs 210 to Rs 230, P/E is 9.1 to 10.2, which is in line with the peers. P/BV is around 1.1 and P/ABV is around 1.2, which are very low compared to its peers. The lower P/BV and P/ABV can help faster appreciation of the scrip, provided it improves its profitability ratios as currently PE is acting as a cap to the rise in the scrip price.