Bank on it

The ICICI Bank issue, according to the prospectus, is to augment its capital adequacy ratio, which was 7.2 per cent at end-December.

Tier-1 capital was 7.47 per cent as at end-March 2002, and, surprisingly, was 7.05 per cent on March 31, 2003, lower than what it was in December.

Incidentally, that hasn't prevented the bank from growing its retail assets by 85 per cent (year on year), and total assets by 16.6 per cent.

The bank has also been a pioneer in securitisation, thereby reducing further the need for capital. Nevertheless, the bank management feels that FY 2005 will see a sharp pick-up in bank credit, due to corporate investments and spending on infrastructure "" hence the need for more capital.

ICICI Bank's profit growth has been very rapid, but much of that growth has been in trading profits "" over the nine-month period till end-December, while net interest income has been Rs 1,351 crore, profit on sale of investments has been Rs 1,055 crore.

With avenues for capital gains diminishing, the bank will have to increase its assets more aggressively to maintain profit growth. Consequently, the need for more capital.

The large supply of new paper coming on to the market is a concern, but much of that has already been factored into the current price which has dropped by around 15 per cent since its peak around February 10, while the Bankex has fallen by only around 4 per cent over the period.

The pricing of the issue is perfectly in order, as a lower price would merely have resulted in selling pressure in the market. The greenshoe option is, of course, an additional source of comfort to investors.

The bank's non-performing assets have always been a worry. While the price to book, at a price of Rs 290, is 2.2, that changes when adjusted for NPAs, going up to 3.5. More important, however, there are several positive trends in distressed assets.

One, restructured assets are becoming standard, thanks to the boom in commodity prices. Two, the transfer of distressed assets to reconstruction companies will help clean up the balance sheet. And three, the bank's thrust on retail housing should ensure that NPA levels are contained.

In any case, the market has for long been aware about the bank's NPAs. There's no denying that for any investor seeking an exposure to the Indian financial sector, especially to the housing finance sector, an investment in ICICI Bank is necessary. The new issue will allow FIIs to increase their exposure to the bank.

CESC rights flotation

CESC is planning a rights issue worth Rs 49.6 crore and the proceeds would be used to finance its expansion plans as well as its working capital requirements. The company has convened an EGM on April 21 to get shareholder approval for the said issue.

Once a loss-making and debt laden electric utility, CESC has seen a turnaround in its fortunes in recent times """" accordingly, the scrip has soared from Rs 24.6 on May 30, 2003 to Rs 95.75 on May 29, 2003. What factors have lead to a U- turn in the performance of this company?

The management of this electric utility has been working on lowering the cost of financing its approximately Rs 3000 crore debt through a restructuring package "" interest costs which currently amounted to Rs 490 crore annually are set to drop to Rs 400 crore in 2004 - 2005.

Also the company has obtained permission from the West Bengal Electricity Regulatory Commission (WBREC) to collect around Rs 520 crore of arrears for FY01 and FY02 by FY05 "" apart from lower bank charges, inflows from these customers should help to improve the cash flow position of the company.

The company's revenue stream is set to improve significantly due to the permission received to revise tariffs "" the WBREC has permitted the electric utility to raise charges by Rs 0.25 / kwh to Rs 4.15 ( an increase of 6.4 per cent) for FY04.

Better tariff realisations have led the management to consider setting up a third 250 mw plant at Budge Budge, West Bengal. Reducing costs through a more efficient supply chain is also playing a key role in the improved performance of the company "" the company is reducing its offtake from West Bengal State Electricity Board by buying power as and when it is needed as compared to the earlier fixed supply of 1100 million units per annum.

Also it is working on trimming its 13, 000 workforce through a VRS programme. Meanwhile, the management is reportedly planning to shut two older power plants as the cost of power produced from these plants is Rs 3.4 / kwh vis-a-vis Rs 2.25 / kwh at the modern facilities.

The recent steps taken by the company have not gone unnoticed ""- foreign institutional investors have enhanced their stake in the company from around 4.5 per cent to approximately 17.64 currently.

With contributions from Amriteshwar Mathur