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ICICI: Will dilution fuel profits? - Views on News from Equitymaster
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  • Mar 23, 2001

    ICICI: Will dilution fuel profits?

    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 í01. 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) FY00 FY01E Change
    Operating income 84,049 94,144 12.0%
    Other income 545 572 5.0%
    Interest Expenses 57,852 65,358 13.0%
    Total revenues 84,594 94,716 12.0%
    Operating profit 26,197 28,786 9.9%
    Provision & contingencies 4,618 6,122 32.6%
    Other Expenses 8,847 9,787 10.6%
    Profits before tax 13,278 13,449 1.3%
    Tax 1,220 1,345 10.2%
    Profits after tax 12,058 12,104 0.4%
    Number of shares (m) 785.3 785.3

    Key ratios
    Particulars FY00 FY01E
    Operating profit Margin 31.2% 30.6%
    Effective tax rate 9.2% 10.0%
    Net profit margin 14.3% 12.9%
    EPS (Rs) 15.4 15.4

    After diluting its stake by 8.6% also, ICICI still holds 47% stake in ICICI Bank. As per the RBIís 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
    Particulars ICICI ICICI Bank
    Market Price (Rs) 86.3 164.0
    P/E (x) 5.6 20.5
    Book Value (Rs) 128.0 63.0
    Price/Book value (x) 0.7 2.6



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