Central Bank of India — IPO: Avoid

Central Bank of India (CBI) is among the last of the nationalised outfits to make a public offer of capital as part of the overall restructuring in PSBs. This restructuring plan has been in operation for close to a decade now and most nationalised banks have already made public offers of capital.
CBI wrote off around Rs 680 crore of accumulated losses against capital in March 2002 and, more recently, in March, restructured its capital base of Rs 1,124 crore to include a perpetual preference share component of Rs 800 crore.
The per share earnings on the reduced equity base of Rs 324 crore based on FY-2007 earnings work out to Rs 13.11. At the lower end of the price band (Rs 85), the offer price discounts the FY-07 EPS by about 6.5 times and at the higher end of the band (Rs 102), by 7.8 times. Valuations vis-À-vis peers
The issue price may not appear aggressive, given the overall market valuations. But it is certainly so in relation to the valuations enjoyed by other PSBs that have a much better performance profile. The trend in the bank’s income and profit performance has not been consistent.
While total income has grown at a CAGR of 7 per cent over the past three years, net profits have shown an uneven trend, declining from Rs 620 crore to Rs 504 crore over the same period. The performance record of CBI and the state of its financials do not give the confidence that the stock can be a good buy-and-hold investment. Similar revamp plan
In recent times, Indian Bank was another public sector bank which followed a similar capital revamp plan as that being put through by Central Bank now. But Indian Bank’s financials were in far better shape at the end of all the business and capital revamp efforts over of the past five years and its business prospects, therefore, appeared good enough to consider an investment exposure.
Central Bank of India appears to be placed in a competitively weak position vis-À-vis its public sector peers on many parameters.
The low level of information technology penetration (which has a bearing on the quality of the database/MIS for driving business — only around 35 per cent of the bank’s business is covered under CBS), the locational profile of the branches (more than 50 per cent in the eastern/central regions which traditionally have not been attractive from the business point of view), the compositional make-up of the assets dominated by lower yielding corporate/commercial loans (75 per cent of total loans is corporate/commercial, retail is 10 per cent whereas in other PSBs, the proportion is skewed more in favour of higher yielding retail loans) the still relatively higher level of NPAs on the books (net 2.6 per cent as of March 2007 against sub-1 per cent for the peers) are all factors that can inhibit good medium-term financial performance. No significant upside
From a stock market perspective, relatively stronger PSBs such as Canara Bank, Corporation Bank, Bank of India, Union Bank of India, Indian Overseas Bank and Indian Bank — a set that can be broadly compared with Central Bank of India in terms of size — are even now (at the high overall market levels), trading in a P/E band of 7 to 11.
There appears to be a certain drag with respect to the valuations of the core group of public sector banks listed above in relation to the multiples enjoyed by their private sector counterparts. In such a situation, it is difficult to see a significant upside for any exposure in the CBI stock.
Offer details: Central Bank of India is entering the market with a public issue of eight crore shares in the price band of Rs 85-102 per share.