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Sunday, Mar 20, 2005

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Suresh Krishnamurthy

FRESH investments can be considered in the stock of IDBI. After its conversion to a banking company, it is now poised to grow faster. The stock price has factored in the growth prospects to an extent, but not all the benefits of conversion to a banking company. As such, given the ruling valuations, the expected growth at IDBI will deliver value to shareholders.

Reasonably valued

The consolidated financial performance of IDBI and IDBI Bank indicate that the merged entity would have interest income of Rs 6,700 crore, operating profits of Rs 1,400 crore and net profits of Rs 475 crore.

On a post-merger equity base of Rs 742 crore and net worth of Rs 6,700 crore, the per share earnings and book value work out to Rs 6.35 and Rs 90 respectively. The PE multiple works out to 15 and the price-to-book value ratio is just more than one.

These numbers indicate that the stock is reasonably valued and some level of growth in profits is factored into the stock price. The potential for growth is, however, far higher.

If IDBI's return on net worth rises from the present level of 7 per cent to about 12 per cent, the per share earnings will rise to more than Rs 10. That would bring down the PE multiple to less than 10.

Growth likely

Such an improvement in the return on net worth is highly likely. This is because conversion will allow IDBI to access cheaper resources.

The net interest margin of IDBI, which is lower compared to that of other banks, will change for the better, post-merger. This could boost growth in operating profits.

In addition, the level of bad loans has now come down sharply. At end-December 2004, it stood at 2.4 per cent for IDBI and will be below 2 per cent, post-merger.

This is mainly due to the infusion of Rs 9,000 crore by the Government into IDBI, which will reduce the need for larger provisions against bad loans.

In terms of consolidated financials, provisions worked out to 60 per cent of operating profits. Even if this comes down by half, the growth in profits would be considerable.

In addition, the demand for bank credit, especially project-funding, is growing rapidly. IDBI, with a capital adequacy of nearly 20 per cent, is in a strong position to take advantage of the growth opportunities.

Growth of 290 per cent in sanctions reported by it during April-December 2004 also point to the likelihood of large growth in disbursements.

Such business growth accompanied by improvement in financial health could lead to strong growth in profits over the next four quarters. That, in turn, makes the present valuations look attractive.

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