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ICICI: Operating on inefficiencies - Views on News from Equitymaster
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  • Feb 6, 2001

    ICICI: Operating on inefficiencies

    Indiaís largest financial institution ICICI reported dismal performance for the 9 months ended FY01. The drop in profits was due to lower other income and high operating expenses.

    In the time frame of first nine months, ICICIís approvals and disbursement recorded a healthy business growth of 36% and 37% respectively. It has also improved risk profile of its asset portfolio through its focus on structured infrastructure finance and retail business. ICICIís retail business accounts for 6% of its total approvals and 9% of its total disbursements. The group now offers a complete range of financial products including insurance.

    Consequent to increase in the balance sheet size by 9.4% (YoY) in the first nine months, ICICIís capital adequacy ratio declined to 16.7% from 17.2% as on March 2000. Still the ratio is well above the minimum 9% as stipulated by the RBI. It is also higher than that of its peers IDBI (14.5%) and IFCI (9.1%).

    Financial performance
    (Rs m) 9m FY00 9m FY01 Change
    Interest Income 58,760 64,820 10.3%
    Other Income 3,140 1,150 -63.4%
    Total Income 61,900 65,970 6.6%
    Interest & Depreciation 47,640 51,090 7.2%
    Operating Profit 14,260 14,880 4.3%
    Other Expenses 2,050 2,880 40.5%
    Provisions & contingencies 3,240 3,320 2.5%
    Profits before tax 8,970 8,680 -3.2%
    Tax 860 740 -14.0%
    Profits after tax 8,110 7,940 -2.1%
    No. of shares (m) 785 785

    Key ratios
    Particulars 9m FY00 9m FY01
    OPM (excl. Other Inc.) 18.9% 21.2%
    Tax / PBT 9.6% 8.5%
    NPM 13.8% 12.2%
    EPS (Rs) * 13.74 13.45
    * annualised

    ICICI continued its efforts to improve the quality of incremental disbursements and focus on aggressive settlements. Its net NPA ratio as on December 2000 declined to 7.2% from 7.6% as at March 2000. ICICI aims to bring down the ratio further to 5% over a period of time.

    During the 3QFY01, ICICI charged an additional amount of Rs 440 m as provisions consequent to the revision of the RBI's provisioning guidelines. Accordingly, sub-standard assets are to be classified as doubtful assets after 18 months of an asset being classified as NPA instead of 24 months earlier. The higher provision is expected to provide a cushion to the institution in periods when it faces financial stress on account of a slowdown in the economy or other reasons such as increasing competition from banks.

    Improving asset quality
    (Rs bn) FY97 FY98 FY99 FY00 9m FY01
    Gross NPAs 28.2 42.1 54.9 60.2 64.6
    % increase 48.0% 49.3% 30.3% 9.6% 7.3%

    During the first 9 months of FY01, the operating margins of ICICI improved sharply to 21.2% (from 18.9%) mainly due to abolition of interest tax (2%) from the beginning of the fiscal year. During the quarter ICICI also replaced a significant portion of its preference shares by lower cost borrowings, consequent to the increase in distribution tax. This has resulted in additional interest expenses. If we were to exclude the additional expenses of Rs 630 m from interest expenses, operating margins would have been higher by another 97 basis points. Nevertheless, a decline in other income hit the profits growth. ICICIís other income declined due to a drop of more than 65% in dividend and lower net capital gain (as compared to the corresponding period of the previous year) by 57%.

    At the current market price of Rs 100, ICICI is trading at a P/E multiple of 7 times its 9 months annualized earnings. We have projected a marginal growth of 0.4% in profits for the year ended March 2001. However, due to lower other income, higher provisions for assets and high operating expenses we have to revise our projections downward.



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