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ICICI: Will dilution fuel profits?

Mar 23, 2001

ICICI, one of the leading financial institutions has recorded a stagnant growth in its earnings in the first nine-month of the current fiscal. This was a result of low other income and higher provisions for non-performing assets. However, its sluggish profits growth is expected to get a boost by a capital gain of over Rs 3 billion from divestment of an 8.6% stake in its subsidiary ICICI Bank. Net of tax, this one time gain will lead to a jump of over 22% in its profits for the year ended March 01. However, the effect of the gain would not be reflected in its bottomline if it decides to use the amount to write off the non-performing assets.

Snapshot of financials
(Rs m)FY00FY01EChange
Operating income84,04994,14412.0%
Other income5455725.0%
Interest Expenses57,85265,35813.0%
Total revenues84,59494,71612.0%
Operating profit26,19728,7869.9%
Provision & contingencies4,6186,12232.6%
Other Expenses8,8479,78710.6%
Profits before tax13,27813,4491.3%
Tax1,2201,34510.2%
Profits after tax12,05812,1040.4%
Number of shares (m)785.3785.3

Key ratios
ParticularsFY00FY01E
Operating profit Margin31.2%30.6%
Effective tax rate9.2%10.0%
Net profit margin14.3%12.9%
EPS (Rs)15.415.4

After diluting its stake by 8.6% also, ICICI still holds 47% stake in ICICI Bank. As per the RBIs guidelines ICICI would have to reduce its stake in the bank further to 40% over a period of time. If it decides to divest the stake in the next fiscal year, the capital gains would further help it in fueling its bottomline growth or cleaning up the balance sheet.

Providing for higher provision with the amount of these capital gains would not only help it in showing a better picture of financials but would also improve its image. At the current market price of Rs 86 ICICI is quoting at a P/E of 5.6 times its FY01 projected earnings (excluding the capital gains) with a price to book value ratio of 0.8 times. Future re-rating in the stock depends on its ability to provide a fair view of the balance sheet and reduction in the level of non-performing assets.

Comparative valuations
ParticularsICICIICICI Bank
Market Price (Rs)86.3164.0
P/E (x)5.620.5
Book Value (Rs)128.063.0
Price/Book value (x)0.72.6

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