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Union Bank of India

An aggressive PSU

Union Bank of India (UBI) made its maiden public issue in 2002. The government of India (GoI) currently holds 60.9% of the pre-issue paid-up equity share capital (Rs 460.12 crore), which will come down to 55.4% after the issue.

As on December 2005, UBI had 2,064 branches and 146 extension counters serving more than 1.5 crore customers. The bank mainly focuses on and will continue to focus on rural and semi-urban regions of India.

The main objects of the follow-on offer include augmenting the capital base. In September 2005, UBI’s capital adequacy ratio (CAR) stood at 10.5% as against the Reserve Bank of India (RBI)-stipulated 9%. The bank intends to take advantage of the domestic economic boom and to venture out internationally. . It plans to expand geographically in India by increasing the volume of retail business and by cross-selling various fee-based financial products and services.

Strengths

• NPAs are reasonable at 4.22% and 1.37% of gross and net advances respectively as on 30 September 2005.
• UBI is perceived as very aggressive in its peer group.
• Good progress has been made towards de-risking the investment portfolio from future interest rate rise.

Weaknesses

Like any PSU bank, fall in treasury gains will continue to limit the rise in profit for UBI also.

Valuation

In the nine months ended December 2005, UBI recorded a growth of 18% to Rs 1776 crore in the net interest income (NII). However, the other income (OI) decreased by 30% to Rs 413 crore. The fall in OI was mainly due to the fall in treasury profit. The operating profit grew 4% to Rs 1138 crore, and provisions declined 20% to Rs 464 crore in the first nine months of FY 2006 compared to Rs 581 crore in the corresponding period of FY 2005. Thus, the net profit increased by 11% to Rs 531 crore.

The scrip currently trades around Rs 120. The last one-year, six- and three-month average price of the scrip stood at Rs 121, Rs 123 and Rs 119, respectively.

At the offer price band of Rs 100-110, P/E works out to be 7x to 7.9x nine-month FY 2006 annualised EPS of Rs 14 on post-issue equity. At Rs 110, September 2005 post-issue book value (BV) of Rs 78 is discounted 1.4 times and adjusted BV of Rs 65 is discounted 1.7 times. The valuation ratios are more or less in line with the peers. However, its aggressiveness will help it outperform the banking sector going forward.

Sharekhan Investor's Eye

Saregama India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs375
Current market price: Rs330

Price target revised to Rs375

Key highlights

• Saregama India Limited (SIL) reported sales of Rs31 crore in Q3FY2006, up 12.5% quarter on quarter (qoq) and up 15.2% year on year (yoy). The sales from music cassettes and CDs/VCDs increased by 6.8% yoy to Rs26.2 crore. However, the revenue from publishing increased by 101% yoy to Rs4.7 crore.
• In spite of a growth in sales, the operating profit declined by 6.4% qoq to Rs2.9 crore. An increase in the royalty expenses was the prime reason for the decline in the operating profit. The company acquired music rights of “Bluffmaster”, “Kalyug” and “Holiday” during the quarter that led to an increase in the royalty expense.
• The interest cost was down by 71% yoy to Rs0.19 crore as the proceeds of the rights issue were used for debt repayment.
• SIL's net profit grew by 41.7% yoy, but declined by 6.8% qoq to Rs2.77 crore.

Union Bank of India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs150
Current market price: Rs125

IPO note

Key highlights

• Union Bank of India (UBI) will be coming out with a follow on public issue of 4.5 crore equity shares in the price range of Rs100-110, which we believe is attractively priced.
• With its pan-India presence, UBI has recorded a strong compounded annual growth rate (CAGR) of 24% in its advances over FY2001-05. We expect the loan book to grow at a CAGR of 22% over FY2005-07E.
• UBI’s net profit is likely to grow at a CAGR of 24% over FY2005-07E and the diluted earnings per share (EPS) are likely to grow at 19%.
• We expect the follow on issue to add Rs9-10 to UBI’s book value based on the issue price.
• At the current market price of Rs125, the stock is quoting at 1.0x its FY2007E book value and 5.3x its FY2007E EPS. We believe that the follow on offer of the bank with a price band of Rs100-110 is attractively priced looking at the fact that its fair price/book value works out to 1.3x based on its strong return on equity. We reiterate our Buy recommendation on the stock with a price target of Rs150.