Changing tack

ICICI Bank's float idea is based on the belief that core sector offers huge opportunities

At a conference call with ICICI Bank last November, the following conversation took place:

Analyst: "On capital adequacy, what would be a comfortable level of Tier-I? Is 7 per cent a comfort level or would you look to raise it?

Kalpana Morparia: Even 6.5% is an extreme comfort level. On being pressed by the analyst whether 7 per cent was comfortable considering the bank's global ambitions, here is what Morparia replied: "Given the growth opportunities that we have, which is primarily in the retail sector, half of which is really residential mortgage which carries just 50 per cent risk weightage, and coupled with the securitisation that I described to you earlier, we feel quite comfortable on the capital and we will much rather deliver, as I said, superior value to the shareholders."

With ICICI Bank seeking to raise Rs 3,000 crore to Rs 3,500 crore worth of equity, clearly there's been much re-thinking in the last three months. What has changed?

The bank has managed quite well in its strategy of aggressively growing its retail assets (these increased 85 per cent in the year to end-December 2003), and has managed to keep its capital adequacy consistently above 11 per cent, largely through securitisation.

During April to December, sell-down of assets was Rs 7,300 crore. There's no problem with capital adequacy so long as the same strategy continues "" total capital adequacy was 11.44 per cent in March 2002, 11.10 per cent in March 2003, 11.15 per cent in September 2003 and 11.32 per cent in December, 2003.

Quite clearly, therefore, the bank now wants to grow its balance sheet, because it believes that opportunities for growth now exist in infrastructure. Morparia says that the government's announcement of a huge infrastructure development programme is what has changed their minds.

She also said that around 15 per cent of the money would be used in bolstering its life insurance venture, which made losses of Rs 113 crore in the nine months to December.

That's normal for the initial years of a fast-growing new insurer, the only drawback from an investor's point of view being that the money will not fetch immediate returns.

There are, however, several other compelling reasons for ICICI Bank to raise money now. One is that, given the recent changes allowing far greater freedom to foreign banks to operate in India, a war chest would be very helpful.

If a foreign bank were to start expanding business aggressively in India, ICICI Bank's 7.1 per cent Tier-1 capital may not be enough to defend market share.

Also, the appetite of the Indian securitisation market may not be enough to enable higher rates of origination. Secondly, the new issue will enable the bank to tap into foreign investors' appetite for the bank's paper.

And finally, raising money when the markets are buoyant is always a good idea.

GlaxoSmithKline Pharma

GlaxoSmithKline Pharmaceuticals has reported a 42 per cent jump in net profit after tax ( before exceptional items) to Rs 181.86 crore for the year ended December '03. Net sales during the year have a marginal growth to Rs 1191.69 crore.

However, things were better in the final quarter, with turnover growing 7 per cent to Rs 246.58 crore. The company's strategy of focussing on 30 priority products has started paying dividends, in the form of optimising marketing costs, greater customer focus and improved efficiencies in the supply chain.

Key brands/product categories of GSK's pharmaceutical division did well last year - Augmentin (an antibiotic), grew at double digits although competitors recorded marginal growth in the financial year.

The company is also leveraging the growth opportunities in the booming vaccine business, by recently expanding its range from one to eight.

EBIT for the pharmaceuticals division grew 46 per cent to Rs 237.3 crore in the year ended December 03, with EBIT margins growing 600 basis points to 23.8 per cent.

Revenues at other businesses of GSK, which include veterinary formulations, diagnostics and exports, declined marginally during the financial year. This was primarily due to a drop in exports of Ranitidine base to the parent company in United Kingdom.

Going forward, the company plans to launch at least three new products each year, either from its parent's portfolio or from that of co-marketing/in-licensing arrangements, and that should help grow the topline significantly.

Also, analysts point out that there is a growing likelihood that the company's property at Worli would be sold in the next 4 - 6 months and that should help improve the liquidity position at the company.

With contribution from Amriteshwar Mathur