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

Suresh Krishnamurthy

INVESTMENTS in the rights offer of IDBI Bank can be considered. The offer price of Rs 22 is attractive, considering the company's fundamentals. In addition, the offer is being made at a considerable discount to the ruling market price of about Rs 32.

Strong fundamentals

IDBI Bank, promoted by IDBI and SIDBI, has been growing fast in recent years. The bank's gross customer assets rose at a compounded annual average growth rate of nearly 24 per cent in the last three years. This is much higher than the growth recorded by public sector banks. The growth is slower relative to new generation banks such as HDFC Bank and UTI Bank but is still impressive.

Importantly, IDBI Bank can boast of all the plus points that new generation private banks generally enjoy. In its funding base, IDBI Bank has a large share of low-cost deposits. Savings and demand deposits accounted for 38 per cent of total deposits at the end of June 2003. Consequently, the bank's cost of deposits is also one of the lowest in the industry.

Its net interest margin, indicator of profitability, is high and expanding. The ratio of bad loans to net advances is also less than 1 per cent. IDBI Bank's branch network expansion and customer acquisition rates are also comparable to the other new generation banks. Its ability to tap the retail sector for both deposits and loans is also high. Retail deposits constitute 59 per cent of total deposits and 33 per cent of customer assets .

What is significant is the impressive growth story continues. Net interest margin, which was about 2.75 per cent at end-March 2003, had expanded to about 3.1 per cent by the end of September 2003. In the first six months of 2003-04, IDBI's housing loan portfolio zoomed up by 80 per cent compared to the amount outstanding at the end of March 2003.

This has boosted the growth rate in advances, which is much higher than the industry average of about 2 per cent for the six months ended September 2003. Expectedly, the proportion of bad loans also registered a decline.

Attractively valued

At the offer price of Rs 22, the stock offers a dividend yield of 5.6 per cent. The offer price is also lower than the book value of the share. The price to earnings multiple, based on the offer price, is also less than 4. In other words, the stock's offer price provides an opportunity to earn capital appreciation.

In fact, the stock is under-valued even at the ruling market price. The valuation of the stock is lower relative to even public sector banks even when the bank has been notching impressive growth in business. This is because of the threat of a merger with IDBI.

A merger with IDBI would transform the exposure of investors from a fast growing bank to a loan-laden organisation with possibility of large bad debts. That may not hold as much potential to deliver returns as the stock of a fast growing bank would.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Large-caps: From a bang to a whimper

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