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The big bank theory

DLF is done. Now is the turn of ICICI bank: hardly an unknown quantity, writes Udayan mukherjee.

india Updated: Jun 18, 2007 04:25 IST
Udayan mukherjee
Udayan mukherjee

DLF is done. Now is the turn of ICICI bank: hardly an unknown quantity. Everybody knows ICICI bank and the track record of wealth creation it comes with. The problem with follow-on public offers, specially those done close to the market price, is that it fails to excite the retail/HNI universe. They can buy their fill from the screen any day; unless there is a substantial discount, there’s not much juice in it. Sure, this issue comes with some innovative payment options but beyond a point these sweeteners don’t work for retail. However, institutional investors, particularly global, will lap up the issue. After all, it’s India’s biggest private sector bank.

In my eyes, ICICI bank is one of the more structural, enduring and secular long-term themes to bet on. Unfortunately, IPO investors tend to weigh issue prospects on the scale of listing gains. This isn’t that kind of issue at all. In fact, in the near term there are challenges: From the interest rate environment, from the risk of diminishing asset quality and from substantial equity dilution. Above all, there is market risk. If there is a substantial market correction in the next few months, ICICI — an index heavyweight, will fall as well. You could get the stock cheaper then. But that is completely unpredictable. Since ICICI is not a play for the pop issue, it is better to consider it from a long-term perspective. Else one may miss the woods for the trees.

As the economy grows, financial services will be one of the explosive opportunities to bet on. ICICI bank’s top quality management has positioned it elegantly to ride this growth curve. Its aggression in retail banking, dominant position in insurance and asset management and sheer size in wholesale banking make it a compelling long-term investment bet. The capital which is being raised will propel growth in the core banking business and in future, value will be unlocked from its various non banking businesses; as is evident in the much talked about $10 billion valuation for ICICI holdings. If you have a 5-year call on this country, you cannot ignore an ICICI bank. If you have a 5-month view, its a close call. Sure, at just under 3 times FY08 book and a PE of 20-plus it is expensive, but show me truly secular growth stocks in this country that are cheap. This isn’t a recommendation to buy the FPO, indeed you will do well to buy it cheaper and on market corrections, but the bigger picture is the story. That reads well.

(The writer is Executive Editor, CNBC-TV 18)

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