ICICI Bank
Recommendation: Buy
CMP = Rs 1,409 (as of Monday)
Price target: Rs 1,528
Key points:
- ICICI Bank has announced plans to unlock value in its subsidiaries by listing them. ICICI Securities is believed to be the first to hit the market and is likely to be followed by ICICI Prudential, ICICI Lombard, ICICI Ventures and ICICI Prudential Asset Management.
- ICICI Securities the investment banking and broking arm with its 1.4 million customer base, wide geographical reach and growing merchant banking business, should see an upside of Rs 296 per share. ICICI Ventures currently manages about Rs9,970 crore, which is expected to reach Rs 24,000 crore by FY2009. At 15% of the assets under management (AUM) benchmark, the valuation indicates additional upside of Rs 21 per share.
- I expect additional upside of Rs 31 per share for ICICI Prudential Asset Management on back of strong AUM growth coupled with better valuation multiple (from 7% of AUM currently to 11% of AUM).
- In total, my estimates indicate a total upside of Rs 299 per share, however I would prefer to wait for the Q3FY2008 results before finalising further estimates.
State Bank of
Recommendation: Buy
CMP = Rs 2,462 (as of Monday)
Price target: Rs 2,680
Key points:
- State Bank of India (SBI) priced its mega rights issue at Rs 1,590 per share at a 35.7% discount to the closing price on January 11, 2008. The bank has announced a rights issue ratio of 1:5 and fixed record date at February 04, 2008. This will expand SBI's capital base to Rs 631.6 crore.
- The Government of India (GOI) plans to invest Rs 10,000 crore in the issue to maintain its 59.7% stake in SBI. Despite the higher-than-expected discount, the rights issue is book-value accretive. SBI's capital adequacy ratio (CAR) should improve from 11.5% in FY2007 to 13% in FY2008. Meanwhile, Tier-I capital is likely to improve to 10.2% (by FY2008) from 8% in FY2007.
- I expect major portion of the rights issue proceeds to be deployed in investments as anticipated deposit growth is sufficient to fund credit growth. Consequently, the return on equity (RoE) and earnings per share (EPS) should remain suppressed in near term while we expect RoE to return to ~15% level by 2011.
- In addition, SBI has announced the approval to issue employee stock options plan (ESOP) making it the first public sector bank (PSB) to launch non-cash remuneration in the form of equity shares. The bank has not disclosed the number of shares earmarked for ESOP.
