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ICICI: Capital gains to add luster

Feb 27, 2001

ICICI has decided to divest around 15% stake in ICICI Bank to a foreign strategic partner. The objective for divestment is to bring down the promoterís holding to around 40% from the current level of 55.7%, in accordance with the Reserve Bank of Indiaís licensing norms. ICICIís stake in the bank, at 62.2% is slated to come down to 55% once Bank of Maduraís merger with ICICI Bank is completed. ICICI will be required to pare its stake further in order to meet the RBIís stipulated licensing norms for new banks. Accordingly, promoterís stake in new private banks should not be more than 40% by March 31, 2001. Since ICICI Bank cannot dilute the parentís stake through a domestic or an overseas issue, the only choice is roping in a foreign partner.

The unlocking of value in ICICI Bank is expected to add a significant gain to ICICIís profits. According to the calculations shown below, capital gain from the sale of stake is expected to add 26% to ICICIís bottomline in the current year (if the sale is concluded in the current year). We have assumed average price of last 6 months (Rs 156) for ICICI Bank to arrive the valuations.

(Rs m)Valuations
15% stake (shares in m) 33.1
Value of stake 5,123
Cost price 331
Capital Gain 4,793
Tax on gain 551
Net of tax gain 4,242
Benefits to ICICI(Rs m)
ICICI's FY01E profits 12,104
Net profit including capital gain 16,346
% addition to profits26%
Number of shares (m)785
Key ratiosFY01E
EPS20.8
Market Price94
P/E4.5
Book Value133.0
Price/Book value0.7

During the nine months ended December í00, ICICI has charged Rs 3.3 bn as provisions for non- performing assets. We have calculated our profits assuming a provision of Rs 6.1 bn for the year ended March í01. We expect ICICI to utilize the capital gains in cleaning up its balance sheet by making more provisions for its non-performing assets.

In FY00 ICICI has provided 11.7% of its net cumulative NPAs of Rs 40 bn to profit and loss account. In the current year it is expected to provide for 13%. Still the balance 87% of net cumulative non-performing assets remains to be provided. ICICI aims to bring down the current NPA ratio of 7.3% to 5% over a period of time through aggressive recovery process.

Improving asset quality
(Rs bn)FY97FY98FY99FY009m FY01
Gross NPAs28.242.154.960.264.6
% increase48.0%49.3%30.3%9.6%7.3%

At the current market price of Rs 94, ICICI is trading at a P/E multiple of 6 times its FY01 projected earnings and a Price/Book value ratio of 0.7 times. Its current valuations are comparatively lower than its global peers. Considering the gains from sale of its stake in ICICI Bank, ICICI is trading at a P/E of 4.5 times. If we were to apply a discount of 60% to Citigroupís current valuations, ICICIís price could easily double from current level. But this depends on its ability to clean up its balance sheet and provide a fair view of the current profits.

To know more about comparative valuations click

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