Suitors eye IFCI's untold riches

For some, it's an entry into India's financial markets. For others, it's an opportunity to spot equity deals or simply an investment that could pay off handsomely.

A total of 10 players ranging from Goldman Sachs and Blackstone to Morgan Stanley and Shinsei Bank of Japan are all pitching for a controlling 26 per cent stake in Industrial Finance Corporation of India Ltd (IFCI) because the institution offers a readymade platform for a foray into corporate finance.

DEFYING GRAVITY
Despite the finances being in poor shape, prospective buyers believe they can use the licences to offer a range of financial services.

The markets obviously share the optimism. Anticipation of fresh capital and a new management that may be able to turn around the institution has pushed up the stock by about 850 per cent over last year to Rs 99 currently. The stock has gained 100 per cent between June and now.

Just two years back, the stock was quoting below par with the institution's bad loan portfolio hitting Rs 2,688 crore. It ended in March 2006 with accumulated losses of Rs 4,698 crore, but during FY05 and FY06 it wrote off or provided for bad loans worth Rs 2,046 crore.

It also managed to restructure a part of the bad loan portfolio and the revival of some sectors helped it to bring down non-performing loans (NPLs) to zero as of March this year.

In January 2007, the management sold its 21 per cent stake in ICRA and also 7 per cent of its 12.44 per cent stake in the National Stock Exchange(NSE).

The profit after tax of Rs 874 crore earned in FY07compared with a loss of Rs 266.2 crore posted in FY06 is primarily the result of the sale from investments""the NSE sale fetched about Rs 795crore""and lower write-offs of just Rs 15 crore compared with Rs 1,130 in FY06.

The accumulated losses at the end of March this year stood at Rs 836, but that's only because the gross loss of Rs 4,772 crore has been adjusted against deferred tax assets of Rs 3,038 crore. In July this year, A K Rai took over as CEO & MD, replacing R M Malla.

Industry watchers said despite the weak balance sheet, there could be some value.

Says Ravi Trivedy, executive director, KPMG: "IFCI could be a good vehicle through which a loan book can be built. Whether it is structured financing, working capital or project finance, a new management could use the existing corporate relationships to grow the business."

IFCI already has a presence in merchant banking, insurance broking and asset reconstruction, and other financial services, giving the buyer licences to operate in these areas.

As Robin Roy, associate director, PricewaterhouseCoopers, points out: "Under the current regulations, this is the easiest way to start quasi-banking operations. It would make things easier when the foreign investment rules are revisited by the government in 2009."

Adds Rashesh Shah, CEO, Edelweiss Capital: "It's not easy to get into the banking space and IFCI can be a good way to lend to corporates. At a later stage, it can always be merged into a bank."

Also, as Abhay Soi, managing director, Halcyon Capital, says: "The market for distressed assets is just beginning to take off. The new management can sell some assets to asset reconstruction companies. That way it also frees up some capital and can create new assets."

The other part of the story lies in the recovery of NPLs. While there are no net NPLs on the books, the management can always pursue recoveries of gross NPLs of Rs 6,700 crore. The analysts believe at least 20-25 per cent of this amount can be recovered.

IFCI also owns close to 500,000 sq ft of commercial space, about 800,000 sq ft of residential space and also has land and buildings hypothecated to it by companies to which it has given loans.

The current market value of listed investments is close to Rs 1,500 crore or Rs 23 per share. The value of unlisted investments including the 5.44 per cent stake in the NSE is about Rs 690 crore or Rs 11 per share. Moreover, there is some cash on the books with the government granting it Rs 1,300 crore for the current fiscal.

Analysts believe that given some amount of recoveries, the book value for FY08 could be far higher than the Rs 0.25 for FY07 but the stock cannot be valued meaningfully on the current financials.

Potential buyers, understandably, would be willing to pay an entry and control premium and also for intangible assets.