• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Suresh Krishnamurthy

FRESH investments in the initial public offer of Vijaya Bank can be considered. The offer, priced at Rs 24, holds the potential for capital appreciation. The stock is available at a price-to-earnings (PE) multiple of less than five times its per share earnings for the year ended March 2003. Based on the dividend declared for 2003, the stock's dividend yield, at 5 per cent, is also attractive. The bank's performance in the first quarter of 2003-04 too was impressive and promising.

A small bank

The smallest public sector bank (PSB), Vijaya Bank's total business volumes as at the end of March 2003 was about Rs 25,000 crore.

It has the second smallest network of branches among the PSBs. Its business is concentrated in the southern and western regions, which account for slightly more than three-fourths of the bank's credit exposure.

However, the bank's performance in the last financial year was impressive. The advances grew about 27 per cent in 2002-03 when the growth rate for the industry was about 16 per cent.

Total deposits rose by an impressive 15.9 per cent — higher than the industry average. Importantly, the bank was able to reduce its gross non-performing assets through a combination of upgradation, recovery and write-offs. It utilised the bulk of the profit on sale of government securities to build its provisions against non-performing assets (NPAs).

This had the dramatic effect of lowering the net NPAs from 6.02 per cent at end-March 2002 to 2.80 per cent in March 2003.

The bank's performance in the first quarter of 2003-04 was promising. Usually, gross advances decline in the first quarter of any year vis-à-vis the end-March figure of the previous financial year.

While this happened for the banking industry, Vijaya Bank managed to grow its advances during this period.

Significantly, it was able to reduce the proportion of its net NPA ratio to 1.69 per cent. These factors augur well for growth in the next few quarters too.

Attractively valued

Yet, not everything is rosy. The proportion of non-fund income to non-fund expenses is low compared to other PSB majors. It has also been a laggard on the technology front. In addition, its small size could prove to be disadvantageous in the years ahead.

However, till now, neither size nor the other factors has affected the bank's business growth.

Importantly, the stock's valuation is attractive. Vijaya Bank's book value as at end-June 2003 was about Rs 22.50.

Adjusted for net NPAs of about Rs 140 crore at the end of June 2003, the book value per share works out to nearly Rs 18.25. However, the bank has said that it is sitting on unrealised gains of nearly Rs 28 per share at the end of May 2003.

The size of unrealised gains is only likely to have increased some more since interest rates have declined further after May 2003.

In addition, the per share earnings for the 12-month period ended June 2003 works out to nearly Rs 9.50. The PE, therefore, gets reduced to about 2.50 times. With the prospect of growth in earnings, the offer price of Rs 24 per share appears attractive.

Investors desirous of picking up a stake through the public offer must be prepared for large over-subscription to the offer.

Not only is the offer price attractive from a fundamental perspective, the stock now trades at a premium of 25 per cent to the offer price.

This can lead to subscriptions from investors looking to flip the stock (buy through the IPO and sell it in the market immediately). As such, bids for shares larger than what they intend to hold is advisable.

Or, if the price declines to Rs 27 - 28 levels, exposures can be added through the market route.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Reject open offer for Swaraj group cos

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line