IDBI - Industrial Development Bank of India

Profile
The Industrial Development Bank of India (IDBI) is one of India’s leading private sector banks and occupies the fourth position in overall ratings. It was established in 1964 as a wholly-owned subsidiary of the Reserve Bank of India (RBI) to provide credit and other facilities for development of the industrial sector. In 2005, IDBI transformed itself into a full-service commercial bank after merging its commercial banking arm, IDBI Bank, into itself. Over the years, IDBI has enlarged its basket of products and services, with its offerings covering almost the entire spectrum of industrial activities, including manufacturing and services. IDBI provides financial assistance, both in rupee and foreign currencies, for green-field projects as well as for expansion, modernisation and diversification purposes.

Also the bank boasts of the distinction of having set up the likes of — The National Stock Exchange of India (NSE), The National Securities Depository Services Ltd. (NSDL) and the Stock Holding Corporation of India (SHCIL).

Promoter

The bank is promoted by the Government of India, with 53 per cent of the stake being vested with the Centre. After that, the biggest chunk is held by institutional investors, who have cornered a fourth of the pie. Of this nearly 12 per cent lies with the financial institutions and banks.

Investment Rationale

Increased Operating Profits

IDBI Bank has over the years successfully transformed itself from a development financial institution (DFI) into a full-service commercial bank. IDBI’s core operating profit witnessed an impressive growth of ~275 per cent year-on-year (YoY) in Q1FY2010. This growth was logged because of an improvement in various operating parameters, margins, lower cost of incomes and healthy growth in advances. However, because of a multi-fold increase in provisioning expenses, net profit growth got restricted to 7.6 per cent.

Operating Expenses Spike

During the quarter, IDBI underwent aggressive recruitment drives and branch expansions implementation, leading to 29 new branches being set up. But this was at the cost of a 50 per cent increase in operating expenses. Despite that, the cost-income (ex-treasury) ratio improved substantially to 52 per cent for the quarter.

Mixed Business Growth

Through Q1FY10, IDBI’s business growth remained healthy at 41.6 per cent YoY. This was led by a 58.9 per cent and 25.4 per cent growth in deposits and advances respectively.

Risk & Concerns

Downturn to Drive NPAs Up

Any disappointment on the economic recovery front may lead to a surge in the bank’s non-performing assets (NPAs) as the bank has exposure to most industrial sectors and hence needs to make higher provisions. This, in turn, could affect the bank’s future profitability.

Unimpressive NII

IDBI’s net interest income (NII) was much less than expected. For the quarter, its NII stood at Rs 316.4 crore. This was significantly higher than the previous year’s quarter at Rs 90.6 crore. The reason behind this may be the possible change in the accounting policy for the recoveries.

Low CASA Ratio

The low-cost deposits as a percentage of the bank’s overall deposits are lesser than that of other government-owned banks, mainly due to the different focus of the entity in its role as a DFI. The peers (other public sector banks [PSBs]) have a current account and savings account (CASA) ratio in the range of 25-40 per cent while IDBI Bank’s CASA ratio is much lower at ~12 per cent.

Restructuring of Loans

During FY2009, IDBI Bank restructured loans worth Rs 3,131 crore and currently has applications for restructuring of loans worth over Rs 5,500 crore. Together these constitute over 8 per cent of the bank’s total outstanding advances. The rate is significantly higher compared with that of other PSBs who have restructured loans to the tune of ~1.5-4.5% of their total loans.

Valuation

Capital adequacy ratio (CAR) of the bank remains above the regulatory requirement of 12.3 per cent with tier-I CAR at 7.11 per cent. The same has improved vis-à-vis 11.57 per cent for the previous quarter, as the bank raised Rs 500 crore through upper tier-II bonds (15-year maturity; coupon rate of 8.95%).

IDBI Bank saw its earnings per share (EPS) grow on an annual basis from 12.3 per cent in FY07 to 15.7 per cent in FY08. Despite the severe slowdown in FY09 the bank grew by 17.8 per cent. It can be considered on dips.

Federal Bank

Federal Bank has emerged as one of the fastest growing banks in the last three years. Investors are advised to consider exposure to the stock for the long term
Beta 0.8
Institutional Holding 70.1%
Dividend Yield 1.6%
P/E 8.4
M-Cap Rs 4143 cr

Federal Bank is the country’s fourth-largest private bank by balance sheet size. This oldgeneration private bank was set up at Travancore (modern-day Kerala) in 1931, six decades before the bigger newgeneration private banks came up post-reforms. A major chunk of its business is concentrated in the south and Kerala contributes almost half to its loan book. The bank has 624 branches in 24 states and is now increasing its presence in neighbouring states like Tamil Nadu, Andhra Pradesh and Karnataka. A market capitalisation of just over Rs 4,000 crore and a balancesheet size of Rs 39,000 crore make Federal Bank one of the smaller banks in the country, but it ranks high on many key parameters. The bank’s net interest margin (NIM) — which is a measure of spread between the cost of borrowing and yield on loans — was 4.1% in 2008-09, the highest reported by a small bank. Only Kotak Mahindra Bank and HDFC Bank fare better on this count. In fact, the bank has maintained an NIM of about 3.5% for seven years now.

Federal Bank has managed to reduce its non-performing assets (NPA) to one of the lowest within a decade. Its net NPAs formed 0.3% of net advances in 2008-09, bettered by only three other banks. In contrast, the bank was struggling with higher NPAs at the start of this decade as these unrecovered loans formed 10% of its advances in 2000-01.

A dose of capital infusion in 2007-08 improved the bank’s capital adequacy ratio (CAR) to 20.1%. As per the Reserve Bank of India norms, banks have to maintain a minimum CAR of 9%. This shows that Federal Bank has a sufficient capital base. However, the capital infusion has resulted in dilution of return on equity (RoE), which fell from 21.3% in 2006-07 to 12.1% in 2008-09. At the current levels of CAR, the bank does not need to raise capital like other banks and no further dilution is expected in near future. Federal Bank’s net profit has risen at an average rate of 30% in the last three financial years, making it one of the fast-growing banks in the country.

A diversified loans portfolio places the bank in a better position to tackle economic slowdown compared to its peers. Loans to corporate, retail and small and medium enterprises segments comprised 37%, 31% and 32% of the total loan portfolio in 2008-09. In the last five years, the bank has increased the share of retail loans in total lending. In 2003-04, retail loans formed only 19% of the loan book.

In a country that continues to face a shortage of housing units, Federal Bank’s strategy of focusing on home loans can not be better timed. In FY 2009 housing loans formed 59% of retail loan book. In fact, secured lending like mortgages helps maintain high asset quality.

The bank also holds 26% stake in life insurance company, which is a joint venture with IDBI Bank and Fortis Insurance Co.

Stock Views on IDBI Bank, Power Grid Corporation, Sintex Industries

Angel Broking on Sintex Industries - Target Rs 248

Angel Broking has maintained its buy rating on Sintex Industries with a target price of Rs 248 in its research report.

"Sintex Industries’ (Sintex) consolidated Net Sales de-grew by 9.1% to Rs 662.4 crore (Rs 728.6 crore) in 1QFY2010. Sintex’s 1QFY2010 consolidated Operating profits stood at Rs 87.4 crore. The OPM for the quarter stood at 13.2%, increasing by 50bp on a yoy basis.Going ahead, we expect the company’s business to be primarily driven by its building construction division. We like Sintex on account of its high revenue visibility in the monolithic and prefab business, where it has an order book position of around Rs 1,600 crore,

with another Rs 190 crore of fresh orders from Rural housing in the pipeline. Despite the slowdown in the auto industry, the company’s custom molding segment is expected to deliver a strong performance in the future, due to robust demand from the electrical segment."

Hem Securities on Power Grid - Target Rs 144

Hem Securities has recommended a buy rating on Power Grid Corporation, with price target of Rs 144, in its report.

"The stock at the current market price of Rs 111.05 will trade 27.65 times to its earnings of Rs 4.02 and 3.20 times to its book value of Rs 34.74 and is expected to provide huge upside potential in medium to long – term. We initiate a ‘BUY’ signal on the stock at the current levels with a target of Rs 144 in the medium term investment horizon (5- 6 months) with an appreciation of about 30%," says Hem Securities' report.

Sharekhan on IDBI Bank - Target Rs 169

"In Q1FY2010, IDBI Bank recorded an impressive growth in its core operating profit (up 275% year on year [yoy]) on the back of marked improvement in various operating parameters (viz. year-on-year [y-o-y] improvement in margins, lower cost to income, strong core fee income growth, healthy advances growth). However, the same could not trickle down to the bottom line on account of multi-fold increase in provisioning expenses (bulk of which relates to Dabhol Power Plant) during the quarter. Consequently, the net profit growth was contained at 7.6% yoy (well below our expectation)."

"At the current market price of Rs 100, IDBI Bank trades at 5.4x FY2011E earnings per share, 2.6x 2011E pre-provisioning profit and 1.0x FY2011E price-adjusted book value. We maintain our Buy recommendation on the stock and shall return soon with a detailed analysis of the bank's Q1FY2010 performance after discussion with the management on the same, target price Rs 169, “ says Sharekhan's research report.

Stock Views on IDBI Bank, Marico, JP Associates

Sunidhi Securities on IDBI Bank - Target Rs 115

Sunidhi Securities & Finance has recommended a buy rating on IDBI Bank, with price target of Rs 115, in its report.

"IDBI Bank has adopted a strategy of developing a larger client base in the mid-corporate, SME and retail sectors while nurturing the deep relationships that already exist in the large corporate sector. IDBI Bank has high quality assets, comfortable capital adequacy, robust other income and strong growth in advances in the current challenging scenario. At the CMP of Rs 87, the share is trading at a P/BV of 0.74 (FY10), P/E of 8.2x on FY09E and 6.1x on FY10E. We recommend 'BUY' with a target of Rs 115 in the medium term," says Sunidhi Securities & Finance's research report.

Sharekhan on Marico - Target Rs 85

Sharekhan has recommended a hold rating on Marico with a target price of Rs 85 in its report.

"We remain bullish about Marico’s prospects. We maintain our earnings estimates but increase our price target for the stock to Rs 85, as we roll the target over based on our 19x FY2011E estimates. However considering marginal upside from current market price we put a 'Hold' recommendation on the stock," says Sharekhan's research report.

Motilal Oswal on JP Associates - Target Rs 227

Motilal Oswal has maintained its buy rating on Jaiprakash Associates with a price target of Rs 227 in its report.

"We expect Jaiprakash Associates to report net profit of Rs 11.8 billion in FY10E (up 38% YoY) and Rs 11.5 billion in FY11E (down 2% YoY). Based on SOTP methodology, we arrive at price target of Rs 227 per share. Stock trades at PER of 24.6x FY10E and 25.1x FY11E. Maintain Buy," says Motilal Oswal report.