Tuesday, March 31, 2009


Value, with lots of negatives cooked in; Initiate at Buy

■ Buy. We initiate coverage on the ICICI Bank with a Buy and a target of Rs430. We expect on-going fundamental improvements and adequate NPA coverage to lead to stable RoEs over FY09-11. We believe the subsidiaries have value, and are not reflected in the stock price.

■ Fundamental improvements underway. The bank has been slowing asset growth and placing greater emphasis on protecting margins, improving productivity and maintaining credit quality. These measures would improvement fundamentals.

■ Subsidiaries have value, not reflected. Key subsidiaries of the bank (in life insurance, general insurance, asset management and the securities business) are leaders in their businesses. In our view, the current price does not reflect the value of the subsidiaries, which we estimate at Rs105.

■ Adequate NPA coverage. At 51%, ICICI’s NPA coverage is not the best, but should hold it in good stead when asset quality is under duress. The coverage ratio is expected to be +50% over FY09-FY11, with net NPAs at ~3.2% in FY10.

■ Valuation. Our fair value of Rs325 (standalone bank) is based on the two-stage DDM (CoE: 15%; beta: 1.3; Rf: 6.5%). We value its subsidiaries at Rs105 a share. At our target price of Rs430, ICICI would trade at 1.1x FY10e ABV. Its target multiple is at a 40% discount to HDFC Bank’s and a 5% premium to the sector.

To see full report: ICICI BANK