A Tale Of Two Issues

TORCH-LIGHT

While a P/E ratio of around five appears a bit rich for Uco Bank, IOB doesn't seem aggressive at a P/E of 2.7

Initial public offerings (IPOs) of banking companies have been hitting the market with remarkable frequency of late. In spite of the issue size being fairly large in most cases, investor response has been overwhelming.

Well, banking stocks have been on a roll ever since the introduction of the Securitisation Bill. Notwith-standing a court ruling calling for a review of some of the more stringent operational aspects of the Bill, there is no dearth of market players who are willing to place their bets on the segment.

Two public issues that hit the market literally back to back were those of the Kolkata-based Uco Bank and the Chennai-based Indian Overseas Bank (IOB). Uco Bank's shares were listed at around a 50 per cent premium to the issue price of Rs 12 and went on to cross Rs 20, thereafter.

The bank, whose existence spans six decades, entered the capital markets on September 3, 2003, with a fixed-price IPO. On offer were 20 crore equity shares of Rs 10 each for cash priced at a premium of Rs 2 per share aggregating Rs 240 crore. The shares are now listed at the BSE, the NSE and the Calcutta Stock Exchange.

The primary objective of the issue was to augment the capital base of the bank to meet its future capital adequacy requirements. As on March 31, 2003, the bank had 1,705 domestic branches, four overseas branches and 10 service branches.

On the same date, the bank's total business aggregated Rs 47,926 crore, on which it earned operating profit and net profit of Rs 660.15 crore and Rs 243.60 crore respectively. The net non-performing assets (NPAs) of the bank stood at Rs 697.14 crore which amounted to 4.36 per cent of its net advances while its capital adequacy ratio stood at 10.04 per cent.

The present capital of the bank stands at Rs 599.36 crore after making an adjustment of accumulated losses to its capital with the approval of the ministry of finance in September, 2002. The write-off gave Uco Bank an opportunity to restart on a clean slate four years ago, and the bank has performed satisfactorily since then.

If one evaluates the bank on a SWOT (Strengths, weaknesses, opportunities and threats) snapshot, the prime negatives include a relatively high NPA level, which needs to be addressed promptly, and the relatively shaky financials which can at best be described as modest.

Like most other banks, treasury gains over the past couple of years have accorded Uco Bank's financials more respectability, though their continuance as a source of higher profitability now appears less likely. Then there is the likelihood of a hit the bank could take on the investments it has made in IDBI and IFCI, particularly the latter.

Another issue is that of the NAV of Rs 15 and the P/E multiple of around five, which when re-worked assume less flattering dimensions. Finally, there appears to be the possibility of an asset-liability mismatch in the times to come, unless corrective steps are taken.

Though an analysis of the pure fundamentals suggests that the bank does not merit a price of Rs 20 plus, the positive market sentiment could override this flaw. Not too many PSU banks are available at a comparable price.

Besides, there is the possibility of a handsome dividend payout, making it a smart yield play. Other positives include a relatively consistent increase in deposits and advances which have grown at compounded annual growth rates (CAGRs) of 17.85 per cent and 23.53 per cent respectively during the last five years.

Yet another positive that could drive the valuation of the bank is the fast approaching consolidation phase in the banking segment. With its revised clean slate and improving efficiencies, the bank could be well positioned for a merger or acquisition.

So, what does one do here? Well, those who have been allotted shares of the bank and have booked partial profits on listing can hold the rest and seek to ride the upside, while protecting the downside by setting a 15 per cent downside stop-loss trigger.

In IOB's case, the public issue (made on September 5) cannot technically be called an IPO as it was its second foray into the capital markets. The issue comprised 10 crore equity shares of Rs 10 each priced at a premium of Rs 14 per share aggregating Rs 240 crore. IOB's shares are listed at the BSE, the NSE and the Madras Stock Exchange.

The objective of this issue, too, was to augment the capital base of the bank to secure its future capital adequacy requirements. Notably, at the time of the issue, the bank enjoyed a capital adequacy ratio of 11.3 per cent against the mandated minimum of 9 per cent. The six-and-a-half decade old bank had 1,427 branches, 243 extension counters and six overseas branches at the end of FY03.

IOB has had a satisfactory financial track record, albeit, like most of its contemporaries, propped by treasury gains over the past couple of years. The bank has also witnessed a consistent rise in deposits and advances which have grown at CAGRs of 13.75 per cent and 14.24 per cent respectively over the last five years.

Yet, given that the deposits are predominantly short and medium term in nature, IOB could be headed towards an asset-liability mismatch unless these deposits get rolled over. Furthermore, the bank's net NPAs stand at a bothersome 5.23 per cent of its net advances.

The bank has hitherto been a regional player with its areas of influence being concentrated in the eastern and southern parts of India. However, the advent and usage of technology could reduce the impact of this limitation in times to come.

The bank, like its PSU peers, has been the beneficiary of governmental benevolence in the form of an adjustment of its accumulated losses against its paid-up equity capital during FY1996-97. To its credit, the bank has kept its slate clean once it was cleared.

Here, too, the positives and negatives rub each other, leaving the call to be made on the basis of its pricing. If one accepts all its figures at face value, a P/E multiple of 2.7 might not seem aggressive at a market price of around Rs 28.

Overall, the bank appears likely to continue to perform well and perhaps even declare a handsome dividend, making it a decent yield play. What merits attention here is that the bank's stock price did not dip below its issue price even when the BSE Sensex had retraced from the 4500-point level to 4200, not too long ago.

In fact, our research team had recommended using the proceeds from the partial profit booked at the counter of Uco Bank to accumulate shares of the qualitatively better IOB.

Indian PSU banks are finally coming into their own. With consolidation appearing inevitable in the banking segment, I see the gap between many of them and their more glamorous private sector contemporaries closing.

(The author heads Lotus Strategic Consultants, Mumbai, and can be contacted at ashokkumar@mantraonline.com. Disclosure: He doesn't have any outstanding interest in the stocks discussed here.)