ICICI Bank: Gaining currency

ICICI Bank's issue at current price will be earnings-neutral

ICICI Bank plans to mop up around Rs 7,000 crore through a combination of an American depositary share (ADS) and domestic issue, with a greenshoe option of another 15 per cent.

The amount seems large but with FIIs still showing a huge appetite for Indian equities, the issue should find enough takers. If Rs 8050 crore is raised at the current price of Rs 525, it would mean issuing around 15.3 crore shares. That would result in a dilution of 17.2 per cent on the expanded equity base.

At this price, the stock is being issued at a trailing multiple on FY05 earnings of 18.75. So the issue will be earnings-neutral because if the bank deploys the entire amount, in say retail assets, it would earn a post-tax yield of 5.33 per cent.

The bank could be looking to price the issue differently in the local and overseas markets, perhaps at a premium abroad and at a discount locally.

Since the foreign shareholding is already at 73 per cent, a little more than a third of the issue needs to be picked by domestic investors. Given its aggressive growth, the bank needs the capital for itself as also for its subsidiaries, so the issue is justified.

Meanwhile, the bank has posted splendid numbers for the September quarter with operating profit up a strong 39 per cent and the net profit up 31 per cent year-on-year. This has been owing to an increase of 39 per cent y-o-y in the net interest income and a 33 per cent rise y-o-y in fee income.

The income on investments has jumped 57 per cent . However, net interest margin has remained flat at 2.4 per cent compared with Q1FY06, primarily because of an increase of 10 basis points in the cost of funds compared with the June quarter.

The bank has managed to bring down its net non-performing loans (NPLs) to 0.97 per cent from 1.96 per cent at the end of the June quarter.

While retail assets continue to grow at a blistering pace"" up 73 per cent y-o-y in Q2 ""- the net NPLs for retail assets are 0.57 per cent. At the current price of Rs 525, the stock trades at 2.8 times the estimated FY06 book value.

If the stock is issued at around this price, there will be an increase in the book value, to around Rs 235, though the RoE will fall to around 14 per cent.

The bank, however, continues to show exceptionally strong growth and its balance sheet too is improving. These two factors should ensure that the re-rating of the stock, which has been a big outperformer, continues.

Ranbaxy: hope floats

Ranbaxy shares lost heavily, even as the company lost an important Lipitor patent challenge in the UK. A UK court upheld the exclusivity of the basic product patent covering atorvastatin, which is the active ingredient in Lipitor, until November 2011.

But it also ruled that a related enantiomer patent covering the calcium salt of atorvastatin was invalid. The enantiomer patent, however, expires more than a year earlier in 2010, which doesn't help Ranbaxy's case since the basic product patent would be in force till a later date. Ranbaxy shares lost 7.1 per cent on the NSE, as a result, and now trade at Rs 455 per share.

Of course, hope still floats for Ranbaxy investors since a similar litigation would be up for hearing in the US, probably by the end of this year. Sales of Lipitor in the US ($8 billion in 2004) were roughly 10 times that in the UK. Also, unlike in the UK, the basic product patent in the US expires in March 2010, about a year before the enantiomer patent expires.

Even if Ranbaxy wins the litigation on only the enantiomer patent in the US (as it did in the UK), it would benefit. Most analysts feel that expecting Ranbaxy to win favourable verdicts on both patents would be unreasonable, and so winning the enantiomer patent could be the best case scenario. Hopes of Ranbaxy selling generics in this space as early as 2008 are now fast diminishing, especially after the UK ruling.

Ranbaxy's valuations, therefore, should in the near future reflect more of its core earnings and less of upsides from Lipitor. Currently, consensus earnings estimates for CY06 stand at around Rs 19-20 per share.

But with consolidated earnings in the first six months of this year having plummeted by 56 per cent, and with no signs of pricing pressure in the generics market abating, there's a strong likelihood that earnings could actually be much lower. For that reason, some wary analysts have earnings estimates that are as low as Rs 14 per share for CY06.

Assuming a forward PE multiple of 20 times, that gives Ranbaxy a fair valuation of anywhere between Rs 280 and Rs 400. Even if one were to assume the higher end of that band, there's still room for a correction of about 10-12 per cent from current levels of Rs 455.

Contributions from Mobis Phillipose