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STOCK
UPDATE
ICICI
Bank
Cluster: Apple
Green
Recommendation: Buy
Price target:
Rs1,020
Current market price: Rs860
Life insurance—the key
driver
Key points
-
We have raised our price target for
ICICI Bank to Rs1,020 primarily due to the improved
valuations commanded by its life insurance subsidiary
and the expected improvement in the return on equity
(RoE) post-FY2008, which should help the core banking
business get better valuations.
-
We expect ICICI Bank to generate a
13-15% RoE and a 24% earnings per share (EPS)
compounded annual growth rate (CAGR) over FY2006-08E.
Considering its unique positioning as the largest
Indian bank with a leadership or second spot across
all the financial services business verticals, we
believe the stock is trading at attractive valuations.
Based on the current market price of Rs860 the stock
trades at 19.5x its FY2008E EPS, 9.8x its FY2008E
pre-provisioning profit and 2.8x its FY2008E book
value. The valuation of all its subsidiaries, joint
ventures etc works out to Rs297 per share of which the
life insurance subsidiary alone contributes Rs252 per
share. We maintain our Buy recommendation on the stock
with a price target of Rs1,020.
SECTOR UPDATE
Banking
CME
base to increase for banks
The Reserve Bank of
India (RBI) in its FY2006 mid-term review of annual
policy statement had announced that the prudential norms
prescribed for capital market exposure (CME) of banks
would be rationalised in terms of base and coverage. The
RBI has tried to address the following key issues in its
revised draft guidelines on the banks' CME applicable
with effect from January 1, 2007.
-
RBI wants to shift the risk arising from
CME: Currently, the banks' CME is restricted to 5%
of their total outstanding advances as on March 31 of
the previous year. With the revised guidelines coming
into effect the CME can go up to 40% of the net worth
as on March 31 of the previous year. By adopting this
approach we feel the RBI wants to shift the risk
exposure of the banks from being a function of loan
growth to the one that is linked to their
profitability. As is evident from the table provided
below, all leading private banks stand to gain from
the new guidelines. The banks which have sound
internal controls and a robust risk management system
have been provided further leeway with the option of a
higher exposure.
-
RBI wants to curb unwanted leverage in the
capital market: The RBI has tried to plug some
loopholes from where it feels the money is slowly but
surely trickling down to the secondary and primary
markets. The banks have been asked to be more vigilant
before granting loans against capital market
instruments and ensure that people are not borrowing
from multiple banks. RBI has also asked banks to make
borrowers submit a declaration about their overall
borrowings against capital market instruments.
-
Retail IPO finance market to be hit: The
move from the RBI looks more likely to curb the huge
over-subscriptions in the recent initial public
offerings (IPOs). Retail IPO finance market would be
affected but it would also lead to better allotments
in the retail category. It also tries to address the
problem of a steep and significant correction, as
witnessed in May-June 2006, partially aggravated by a
cascading effect caused when the banks start
liquidating securities to reduce the leveraged
position of the borrower.
-
Monitoring of intra-day exposures:
Currently there are no explicit guidelines for
monitoring banks' intra-day exposure to the capital
markets. However, the RBI wants that the respective
boards of the banks should have fixed intra-day limits
and should monitor the same on an ongoing
basis.
VIEWPOINT
Matrix
Laboratories
Investor should avail of the open
offer
DSP Merrill Lynch Ltd (on behalf of MP
Laboratories [Mauritius] Ltd and Mylan Laboratories
Inc—the acquirer of Matrix Laboratories Ltd) has
announced the revised schedule for the open offer for
Matrix Laboratories Ltd shares. The open offer starts on
November 22, 2006 and closes on December 11,
2006.
Maylan Laboratories Inc (Mylan), subsequent
to its acquisition of the 51.5% stake in Matrix from the
private equity players, has already proposed to buy up
to 3.08 crore voting equity shares of Rs2 each of Matrix
Laboratories, constituting 20% of the equity, at a price
of Rs306 a share payable in
cash. |
