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UTI Bank: GDR gains - Views on News from Equitymaster
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UTI Bank: GDR gains
Mar 15, 2005

After posting robust results (35% YoY bottomline growth) for 9mFY05, UTI Bank is all set to cash in on its ‘goodwill’, by raising additional capital through a US$ 250 m GDR issue. The issue of 47 m shares will lead to 20% stake dilution and bring down the stakes of UTI – I (specified undertaking of UTI) and LIC, both principal promoters of UTI Bank, to 22% and 11% from 33% and 13.5% respectively. HSBC’s stake in the bank will also get diluted from 14% to 12%. UTI Bank, which had a CAR of 11% at the end of 9mFY05, was to see the ratio decline to 9% by FY05 in the event of no additional capital infusion. The GDR issue is therefore envisaged to suffice the bank’s CAR requirements and enable it to meet the Basel II norms.

Projecting dual image
On one hand, aided by a higher proportion of low cost deposits (72% of total deposits) and 58% YoY growth in advances, UTI Bank has succeeded in amplifying its net interest income (30% growth YoY). But on the other hand, the bank adopted a diverse approach of ‘writing back’ provisions as against the usual policy of providing for them. Although its net NPA to advances ratio of 1.3% reflects one of the best asset qualities amongst its peers in the industry, the NPA coverage ratio, which stands at 43%, is way below the industry average of 60%. As against expectations, despite having surplus profits, the bank remained frugal in providing for the incremental slippages.

What will the GDR issue bring?
The issue of 47 m shares (assuming a price of Rs 250 per share, which is close to current market levels) will add Rs 11.7 bn to the bank’s networth and hike the adjusted book value per share to Rs 80, which will make the valuations more attractive as compared to the current levels.

  Pre GDR Post GDR
No of shares (m) 230.2 277.2
Networth (Rs m) 11,380 23,130
BVPS (Rs) 49.4 83.4
Adj BVPS (Rs) 46.0 80.6
EPS (Rs) 12.1 10.0
P/BV * (x) 5.52 3.15
* considering price as on 9th March 2005

But instead of dwelling on the optimism of short-term gains, it is pertinent to estimate the long term earning potential of the bank on the back of additional availability of resources. As a thumb rule, of every Rs 100 that a bank has, only Rs 57 can go for corporate and retail advances, the rest being consumed in SLR/CRR and agriculture lending requirements.

Incremental lending
  Rs Rs (m)
Available funds (1) 100 11,750
SLR (2) 25 2,938
CRR (3) 5 588
Agri loans (4) 13 1,528
Corporate+ retail advances (1-2-3-4) 57 6,698

We can thus comprehend that the additional capital infusion of Rs 11.7 bn will dispense Rs 6.7 bn (57%) for the bank’s corporate and retail lending. The net aggregate lending will thus witness a growth of 5% over 9mFY05. Here we assume that, the demand for non-food credit will not abate and the bank’s incremental lending capacity will be utilised to its optimum levels.

Translating into bottomline…
Rs m Retail Corporate Total advances
9mFY05 advances 39,170 92,320 131,490
Ratio 30 70  
Incremental advances 2,009 4,688 6,698
Total 41,179 97,008 138,188
Growth (over 9mFY05)     5%
NIM     3%
NIM * Total advances     4,173
Addition to topline (NII)     4,173
Net profit margin     27%
Addition to topline     1,127
Additional EPS (Rs)     4.06

At the current NIM level of 3%, the incremental earning assets will render an additional topline of Rs 4.1 bn for the bank and an additional bottomline to the tune of Rs 1.1 bn. This is ignoring the returns from SLR investments and agriculture loans.

Our view
At the current price of Rs 263 the bank is trading at 5.7 times its 9mFY05 book value. Post GDR issue, even at FY07 estimated figures, the stock is hovering at a rich 3.1 times price to book value. Despite the anticipated GDR gains, the current valuations are still above our sell limit of 2.5 times book value.

While there is no uncertainty about the bank maintaining consistency in its performance levels and optimizing on its growth potential, its seeming complacency with regard to maintaining its asset quality remains our area of discomfort. With government restricting foreign investment in private banks to 5% (with exception to those that need to be restructured), HSBC’s stake in the bank is unlikely to see any upward revision atleast in the near term.

Valuations FY05E FY07E
Networth (Rs m) 11,380 24,257
Price / book value (x) 5.52 3.11

Despite factoring in the ‘best case scenario’ post the GDR issue, valuations seem to be stretched beyond the desired levels even in the longer term. Thus, considering the fact that all possible ‘optimisms’ have already been factored in the prices, it is best to avoid the stock at current levels, despite the overall strength in its balance sheet.

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