ICICI Bank: Value buy

ICICI Bank's issue is attractively priced given its growth prospects

ICICI Bank has set a price band of Rs 505-545 for its Rs 5,750 crore domestic issue. Together with the American depositary share issue, the post-issue dilution would be 17.8 per cent and 16.7 per cent at the lower and top ends of the band, respectively.

The valuation at Rs 505 works out to a price earnings (P/E) multiple of 13.2 times estimated FY07 earnings and at Rs 545 it would be a multiple of 14.3 times.

In terms of price to book value (P/B), at Rs 505 the issue would be valued at 1.86 times FY07 and at Rs 545, it would be nearly two times P/B.

The valuation is lower compared with that of HDFC Bank, which at the current price of Rs 685, trades at just over 19 times estimated FY07 earnings and at 3.4 times price to estimated FY07 book value. HDFC Bank commands a premium since it earns better margins and its asset quality is perceived to be superior.

While ICICI Bank's return on average equity will fall by around 400 basis points to 15 per cent, the issue is not earnings dilutive. Thus, the issue is attractively priced given the bank's tremendous track record. It commands a share of over 30 per cent of the consumer loans segment and is the market leader in almost every segment in which it operates.

Besides, the bank has been cleaning up its books with net non-performing loans (NPLs) now at less than one per cent of assets. Given the buoyant economy, the bank should be able to grow its assets at around 30 per cent for the next few years and improve its net interest margins. Besides, the bank has several fast-growing subsidiaries in insurance and venture capital.

The scrip closed at Rs 538 on Wednesday. Retail investors could bid at the cut-off price, since they are entitled to a 5 per cent discount.

GDP: Hot numbers

Going by the strong gross domestic product (GDP) data in the September 2005 quarter, the recent revision of the 2005-06 GDP forecast, by both NCAER and RBI, does not seem out of place.

NCAER raised its forecast from 7.1 per cent to 7.6 per cent for 2005-06, while RBI upped its estimate from 7 per cent to 7-7.5 per cent.

Compared with a 6.7 per cent growth in Q2 of 2004-05, the GDP grew by 8 per cent in the last quarter. This comes after an 8.1 per cent growth in Q1 this year. A lower base in Q2 of last year has helped in the higher GDP growth this quarter, especially in sectors such as agriculture, construction and some services.

Agriculture grew 2 per cent last quarter on good monsoons against a flat performance in Q2 last year. Trade, hotels, transport and communication rose 12 per cent last quarter, compared with a higher base of 12.3 per cent growth in September 2004. 

ON A ROLL
Y-O-Y growth in %	Q1	Q2
Agriculture	2.0	2.0
Manufacturing	11.3	9.2
Construction	7.9	7.4
Trade, hotels, transport and commn.	12.4	12.0
Financing, risk realty & services	8.3	9.9

But financing, insurance, real estate and business services have grown at 9.9 per cent in Q2 of 2005-06, the highest quarterly growth since 2003-04.

Manufacturing has posted a growth of 9.2 per cent on a high base, while construction has risen by 7.4 per cent. The growth in Q3 should be robust because of the lower base of last year's Q3 GDP and an improvement in agriculture, which is expected to grow 3.4 per cent in 2005-06.

JK Industries: Flat operating profit margin

JK Industries has managed to more or less offset higher rubber prices in the September quarter. The key cost""consumption of raw materials as a percentage of net sales""has grown almost 168 basis points to 67.7 per cent in the September quarter.

A cushion for operating margins for players such as JK Industries has, however, been provided by the decision of several tyre firms to retain about half of the reduction in excise duties, that had been announced in the last budget.

The budget had earlier reduced excise duties on tyres from 24 to 16 per cent. As a result, the company's operating profit margin has remained more or less flat at 6.17 per cent in the September quarter.

Earlier, Apollo Tyres has grown its operating profit by 277 basis points to 9.38 per cent in the September quarter. Meanwhile, the current upturn in the automobile industry has helped JK Industries' net sales expand 15.4 per cent to Rs 592.8 crore in the last quarter.

The stock has outperformed the Sensex over the past one month, gaining 17.6 per cent compared with a 14.2 per cent gain in the broader market. The stock appears fully valued at 22.5 times trailing earnings.

With contributions from Shobhana Subramanian and Amriteshwar Mathur