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ICICI, ICICI Bank - Divergence in valuations - Views on News from Equitymaster
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  • Jun 12, 2000

    ICICI, ICICI Bank - Divergence in valuations

    The Indian financial service sector is witnessing unprecedented changes fuelled by economic deregulation and technological innovations. The Internet is changing the competitive dynamics of the financial services business in India. ICICI is one among the financial institutions, which is capitalising on the opportunities thrown by the Internet with the adoption of latest technology.

    ICICI is leveraging on the concept of ‘Universal Banking’ to provide one stop financial services. The valuations of the company are however not reflected in its market price due to its high level of non performing assets.

    ICICI Bank, India’s first technology savvy bank is a 62.2% subsidiary of ICICI. The bank enjoys higher valuation in the market compared to its parent due to its better quality of loan portfolio. Also the different types of services provided by it with web enabled products gives it an edge over other banks. The bank’s thrust is mainly on retail products and internet banking services. Focussing on the retail market has enabled the bank to maintain the lower NPA ratio.

    Comparative financial performance
    Particulars ICICI Bank ICICI
    Interest income (Rs bn) 8.5 86.3
    Growth 56.8% 17.5%
    Net profit (Rs bn) 1.1 12.1
    Growth 66.2% 20.5%

    Although the revenue and profits of the bank are one tenth that of its parent, in terms of valuation it compares equally. The mismatch in valuation is due to higher level of NPAs of ICICI.

    Key ratios
    Particulars ICICI Bank ICICI
    Operating profit margins 21.8% 26.2%
    Net profit margins 12.3% 14.0%
    CAR 19.6% 17.2%
    NPAs 1.1% 7.6%
    EPS (Rs) 5.4 15.4

    The valuation of ICICI’s 62.2% stake in ICICI Bank is at around Rs 261 bn at the current market price of Rs 214 of ICICI Bank. The interesting fact to note is, if we calculate current market value of its investment it turns out to be Rs 168 per share. In other words, the market is ignoring the business, brand and investment valuation of ICICI. Even if we consider the non-performing asset of Rs 39.6 bn, which has increased by 6.1% in FY2000, the company will easily be able to absorb the same with its investment which are worth more than Rs 106 bn as on March 2000. The re-rating in the stock is likely in time to come with its efforts to reduce the level of NPAs.

    Comparative financial valuations
    Particulars ICICI Bank ICICI
    Market Price (Rs) 213.7 130
    Price/Book value (x) 3.7 2.9
    Market Cap (Rs bn) 42.1 101.8
    Market Cap/Gross income (x) 4.9 1.2
    Dividend yield 0.7% 4.2%



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