ICICI Bank is a frequent equity diluter, with large equity issues in February 2004 and December 2005. But these have had little impact on the stock, which has easily outperformed the BSE Bankex.
Most of the rise in the stock price, however, has been because of a higher price-earnings ratio, rather than on account of an increase in earnings per share. In other words, although frequent dilutions have taken a toll on earnings per share, the market’s re-rating of the value of the firm has more than made up for it.
The most recent instance was the divestment of a stake in ICICI Financial Services, the holding firm for its insurance and asset management subsidiaries, which has led to a higher valuation for the company.
That’s not the whole story, however. If we take book value per share instead of earnings per share, then the valuation of the bank has been more or less a consistent 2.5 times the book value, except during the past one year when the valuation shot up. The public issue will bring the book value per share back to around its historical average—at the lower end of the price band, the price will be around 2.2 times the book value, around the same valuation as ICICI Bank’s last issue in December 2005.
Can ICICI Bank investors hope to see a repeat performance for the stock after the current issue? In the past the bank has used the funds it raised to aggressively grow its retail loans, making it the No. 1 retail bank in the country. This time, it plans to boost lending for infrastructure and manufacturing projects. This will be the right time to do so, with large capacity additions by firms and plans for a sharp rise in infrastructure spending. The capital issue will take ICICI Bank’s net worth past that of the State Bank of India, enabling it to pose a stiff challenge to the market leader.
However, lending aggressively is not enough—the bank needs to increase its deposit base and its share of low-cost deposits if it wants to avoid coming to the market at frequent intervals. That’s where the bank’s rapid branch expansion plans and the acquisition of Sangli Bank will come in useful.
In short, an exposure to ICICI Bank is essential if one wants an exposure to the Indian economy. But does that entail subscribing to its follow-on offering? The pricing is very tight, considering that the stock quotes well below the price at the high end of the band. And although the Rs50 discount is a safety cushion for retail investors, it’s worth remembering the stock had a low of Rs822 in May. But institutional investors will take the opportunity to increase their exposure to the banking sector.
Data collated by EPFR Global shows that India equity funds recorded net outflows of $367 million (Rs1505 crore) in the week to 13 June. This happens to be the eighth straight week of outflows from India-focused funds tracked by EPFR Global. Since January, such funds have seen outflows of $1.67 billion.
This doesn’t seem to reflect in foreign institutional investor (FII) net inflow/outflow figures released by stock market regulator Sebi. FIIs sold equities worth only Rs167 crore in June and were net buyers of Rs4,270 crore worth equity in May. But the true picture is revealed in data on FII activity in the futures market. Here, FIIs have been heavy sellers—to the tune of Rs4,703 crore in June and Rs2,969 crore in May.
Many trades done by FIIs are arbitrage trades done to profit from the spread between the two markets. After netting off the trades in the two markets, it turns out that FIIs have been net sellers worth Rs3,570 crore since May. EPFR Global data is generally known for its predictive power. With their data showing continued outflows, it wouldn’t be surprising if FIIs continue to be net sellers in India.
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