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ICICI – Great, minus the NPAs

Nov 27, 2000

ICICI, one of the largest financial institutions in India, is gearing up to transform itself into a Universal Bank. For this, it plans to leverage on the ‘click and mortar’ strategy. ICICI has reported a disappointing financial performance for the first half ended September 2000. Due to a substantial drop in other income (down 85%), ICICI’s net profits increased by marginal 0.3%. The decline in other income was due to a capital loss of Rs 400 m (capital gain of Rs 950 m in 1HFY00) and lower dividend income from ICICI Securities Ltd. Nevertheless, ICICI has managed to improve its operating profit margins to 22.3% (from 19.8% in 1HFY00).

We have projected a 12% topline growth and a flat profit growth for the year ended March 2001. The lower profit growth is due to decline in other income and higher provisions on substandard assets (according to revised RBI guidelines substandard assets are to be classified as doubtful assets after 18 months of an assets being classified as NPA instead of 24 months earlier).

Financial Snapshot
(Rs m) 1HFY00 1HFY01 Change
Interest Income 38,990 43,104 10.6%
Other Income 1,416 220 -84.5%
Total Income 40,406 43,324 7.2%
Interest & Depreciation 31,271 33,497 7.1%
Operating Profit 9,135 9,827 7.6%
Other Expenses 2,136 2,933 37.3%
Provisions & contingencies 1,010 990 -2.0%
Profits Before Tax 5,989 5,905 -1.4%
Tax 590 490 -16.9%
Profits After Tax 5,399 5,415 0.3%
Equity shares (m) 785 785  

Key Ratios
Particulars 1HFY00 1HFY01
Operating profit margins 19.8% 22.3%
Tax / PBT 9.9% 8.3%
Net profit margins 13.4% 12.5%
EPS (Rs) 13.75 13.79

The institution is continuously diversifying and de-risking its asset portfolio. Manufacturing finance now forms around 39% of total loan portfolio (from 73% in FY97). The decline in manufacturing project finance has been compensated by higher corporate finance loans (36% of total loan portfolio) and retail finance (2%).

However, the disappointing fact is that ICICI derives more than 60% of its net profits from industrial financing, which has a high level of NPAs and, therefore, lower returns. Project financing contributes to a large proportion of the NPAs. This is the reason why ICICI is moving towards increasing its retail activity.

ICICI has emerged as a financial super market. The institution now offers all financial needs of an individual. The retail services provided by it include home loans, auto loans, personal loans, depository services, retail bonds, credit cards and NRI remittances. Further, it has also planned to enter life insurance and general insurance business. Wide range of services provided by ICICI would help in increasing its client base with a significant presence in the retail segment. This also provides an opportunity to cross sell products in the future.

At the current market price of Rs 84, ICICI is trading at a P/E multiple of 5 times its FY01 projected earnings with a Price/Book value ratio of 0.7 times. ICICI's lower market valuations are due to its higher non-performing assets. Although its net NPA ratio as on September 2000 declined to 7.3% (from 7.6% in March 2000), it is higher compared to HDFC's 0.9%. For ICICI to improve its valuations, the management will have to convince investors of its resolve to improve the quality of its asset portfolio.

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