Second IPO in as many years
Capitalising on the strong FII interest in the India growth story
ICICI Bank (ICICIBK), India's largest private sector bank and the second largest bank in India in terms of assets, is coming out with a second public offer 19 months after its first. The bank’s previous issue raised Rs 3500 crore including a green-shoe option of Rs 450 crore in April 2004. It now expects to raise up to Rs 5750 crore including a green-shoe option Rs 750 crore from the domestic market. Additionally, Rs 2300 crore including a green-shoe option of Rs 300 crore will be raised via an ADS issue.
In March 2002, ICICI, the company’s parent and a leading financial institution, along with two of its subsidiaries were merged with ICICI Bank, which pioneered the era of universal banking. ICICIBK and its subsidiaries offer a wide range of products and services to retail and corporate customers, both in the domestic and international market. Over the years, the bank has emerged as a one-stop shop for almost all the financial services. It has demonstrated its ability to spot and enter new market segments and establish the size and market leadership in a short span of time. Leveraging technology has been a key element of the bank’s strategy.
The main object of the issue is to augment long-term resources in line with the estimated growth in assets and maintain a comfortable capital adequacy ratio (CAR) taking into consideration the stringent Basel II requirement. The capital adequacy ratio (CAR) on September 2005 stood at 11.52% (including Tier-1 capital adequacy of 7.24%), well above RBI’s requirement of 9%.
Strengths
*Technology, leadership in retail finance (fastest growing segment with relatively better margin), one of the best network among private banks, and experience and balance sheet strength to finance infrastructure growth (emerging segment with tremendous potential) are ICICIBK’s key strengths. Rural finance and international banking are the two new growth drivers identified by the bank.
*The group companies involved in businesses like securities trading, insurance (life and general), mutual funds and venture capital provide tremendous growth opportunities in the coming years and ICICIBK will be a significant gainer in terms of synergy as well as their increasing valuations.
*Among the peer group, ICICIBK has one of the best productivity ratios in the industry with business per employee at Rs 880 lakh and profit per employee at Rs 11 lakhs. The return on average assets at 1.5% in FY 2005 is at par with the best in the industry considering its large asset base.
Weaknesses
*The net interest margin (NIM) has stayed stable at 2.4% in the past few quarters, which is lower than the peer group margin. Its long-term high cost borrowings and strategy to acquire market share by lowering interest rates on the lending side and offering aggressive rates on bulk deposits have restricted the NIM growth.
*The burden of relatively high provisions coupled with aggressive expansion-lead growth in operating expenses are not allowing one of the fastest growths in the business to get reflected in the bottomline growth.
*Due to frequent equity dilutions, the bank’s EPS growth is lower than its peers. Between FY 2003 and FY 2005, ICICIBK's year-end EPS had grown at CAGR of 17.5% compared to UTI Bank's 20.8% and HDFC Bank's 24.9%. This year again, ICICIBK’s equity will expand by around 20% due to the current issue, while net profit is likely to grow around 21% as per analysts’ consensus estimates. Thus, there will be insignificant growth in EPS.
H1FY06 results
In the six months ended September 2005, ICICIBK recorded a healthy growth of 37% to Rs 1805 crore in net interest income, driven by a 37% rise to Rs 4320 crore in interest on advances. The fee income advanced 43% to Rs 1362 crore and treasury profit increased 96% to Rs 423 crore. The operating profit was up 54% to Rs 2015 crore, but provision rose by a staggering 150% to Rs 602 crore mainly on account of an amortization premium of Rs 339 crore on government securities. The net profit has improved by 27% to Rs 1110 crore. The total business of the bank increased by 62% to Rs 227523 crore on September 2005, of which deposits grew 68% to Rs 120452 crore, while advances were up 56% to Rs 107071 crore.
On September 2005, its net NPA (NNPA) ratio stood at 0.97% (Rs 1080 crore). However, in June 2005 it stood at 1.96% (Rs 2030 crore). This improvement is attributed to the resolution of the Dabhol imbroglio.
Valuation
At the offer price band of Rs 505-545, PE, P/Book Value and P/Adjusted BV (based on pre-issue figures) work out to 18.6-20.1, 2.7-2.9, 2.9-3.1. Retail investors will get 5% discount on the issue price. The market price of Rs 536 crossed the upper limit on the announcement of the price band. The scrip was outperforming the BSE Sensex till the announcement of the IPO. After that it has underperformed the Sensex from the last issue closing date to the current issue opening date.
In FY 2006, the bottomline growth may not be significantly higher than the growth in equity, restricting the EPS growth to single digit. BV will improve about 30% due to the premium collected in the issue. The valuation ratios are high compared to the unexciting growth rate in EPS in the past as well as in the current year. However, in view of the growth potential in retail and infrastructure finance, foreign investors (who already own 72.4% and will get more buying scope after the IPO) will continue to get attracted to the stock, ensuring that the scrip tracks the broad market.