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ICICI – Unlocking Value

Sep 6, 2000

ICICI is all set to unlock value of its investment in a wholly owned subsidiary company ICICI Infotech Services Ltd. (IIFS). It has decided to sell up to 10% of its stake in IIFS. IIFS is engaged in software services and consultancy services. We have attempted here to find the approximate value of this stake based on the business analysis of the company and its future plans.

IIFS started its business as an entity entrusted with the task of IT enabling the transaction-processing system of its parent ICICI. During FY00 IIFS has ventured into areas software consultancy and IT infrastructure & network management. It has plans to focus on software development relating to the financial sector, web based development, embedded software and WAP related development.

Currently the company derives its revenues from ICICI group and serves as its technology service backbone. However it is exploring business opportunities outside the group, both domestic and international. It is well positioned to reap advantages of being a part of the ICICI Group. ICICI’s brand equity and business opportunities arising out of group initiatives will enable IIFS to grow faster than its peers. During FY00, IIFS has registered a spectacular growth of 249% in its profits to Rs 105 m and a 139% jump in revenues to Rs 418 m. IIFS has reduced the contribution from transaction processing business to 66% in FY00 (100% in FY99). Income from software services contributed 24% and IT infrastructure and facility management accounted for 11% of total revenues.

Financial Performance
Year End March 31 (Rs m)FY99FY00% change
Sales 175418139.0%
Total Income175420139.9%
Operating Profit52167221.5%
Gross Profit47162242.5%
Net Profit30105248.9%
Equity (No. of shares in m) 1010 

Key Ratios
OPM (excl. Other Inc.)29.6%39.5%
Tax / PBT26.6%28.9%
Cash EPS (Rs)3.6511.95
EPS (Rs)3.0110.51

IIFS has plans to diversify its geographical mix by targeting countries like North America, Europe and Asia Pacific. The company has already established its US subsidiary ICICI Infotech Inc. in New Jersey in a bid to establish its presence in the American market. The company currently has an employee strength of 750, seems to be relatively over staffed.

Let’s calculate the business value of the company. We have assumed a P/E of around 30 times (on a conservative basis) taking into account the business of the company, its future growth prospects, brand equity of ICICI and the valuations enjoyed by companies in the similar business. This gives us a value of around Rs 315 m for a 10% stake of ICICI. This forms less than 1% of the total profits of ICICI. Once IIFS is listed on the bourses, ICICI will be able to unlock the value further (as its remaining 90% holding will then be valued by the market at its market price rather than the book value of Rs 14 per share).

IIFS has plans to raise fresh equity upto 10% of its current capital (Rs 50 m) by means of an IPO in the near future. Currently the company has debt of Rs 224 m in its books, which is sourced mainly form the parent company. The proceeds of the equity offering would be used to retire this debt and to fund future acquisitions. During the year the company has acquired Rohan Software Private Ltd., a domestic software development company in the areas of banking and financial services and Ivory Consulting, a software service provider in the US. These developments further confirm the company’s future growth prospects.

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