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IPO Analysis
Indian Overseas Bank - Recommendation: Buy
Background
Issue Details
Issue price Rs 24 (premium of Rs 14)
Issue size 10 crore shares
Face value Rs 10 each
Issue opens September 5, 2003
Issue closes September 12, 2003
Minimum Application 100 shares
Minimum investment Rs 2400
Lead managers SBI Caps, DSP Merrill Lynch, Kotak Investment Bank
Registrar Cameo Corporate Services

Financial Snapshot

(Rs. in crore) FY01 FY02 FY03 Chg (%)
Total Income 3095.8 3701.5 4005.8 8.2
Interest Income 2793.4 3170.69 3485.9 9.9
Other Income 302.4 530.8 519.9 (2.1)
Expenditure 2789.2 3085.1 3211.7 4.1
Interest Expenditure 1912.7 2200.6 2264.4 2.9
Operating Expenditure 876.6 884.5 947.2 7.0
Profit before provisions & contingencies 306.6 616.4 794.1 28.8
Provision & Contingencies 190.7 386.1 378.0 (2.1)
Net Profit 115.9 230.2 416.1 80.7
Equity Capital 444.8 444.8 444.8  
EPS (Rs) 2.6 5.2 9.4  
Book value (Rs) 17.3 21.6 29.2  
Adj. book value (Rs) (3.5) (0.2) 8.7  

Key Ratios

Financial Year ended March 31st, 2002 2003
Net NPA to Net Advances ratio (%) 6.32 5.23
Interest income/ Average working fund (%) 9.14 8.74
Non-Interest income/ Average working fund (%) 1.53 1.3
Return on Assets (%) 0.65 1.01
Net Profit/ Average working fund (%) 1.78 1.99
Capital Adequacy ratio (%) 10.82 11.3
Tier I 6.17 5.83
Tier II 4.65 5.47
Average interest yield on assets (%) 10.40 9.85
Average interest on liabilities (%) 7.40 6.59

Valuation

The issue has been priced at Rs 24 (premium of Rs 14 per share) amounting to discounting of around 2.5x its FY03 earnings of Rs 9.4 per share. The price/book value works out to 0.8x its FY03 book value (Rs 29). This appears to be attractive as compared to average P/E multiple of around 4x FY03 earnings and P/BV of 1.1-1.4x commanded by most of its peers. However, given the high level of net NPAs, the adjusted book value works out to a mere Rs 8.7 per share. This amounts to P/Adj. BV of 2.76, which is quite overstretched.

Not withstanding the concerns, we believe the issue could provide decent returns over short-to-medium term. Especially given the prevailing buoyant sentiments in the market. Currently, the scrip already trades around Rs 28 (about 17% higher than the offer price). We recommend a buy.

Shri Chidambaram Chettiar founded Indian Overseas Bank (IOB) in 1937. It has the distinction of having an overseas branch from the very first day of the operations. As on March 2003, the bank had 1,433 branches and 243 extension counters (including six overseas branches). Around 51% of its branches are concentrated in Tamil Nadu and Andhra Pradesh. It has fully computerised all its branches and operates 100 ATMs across the country.

The Bank has sponsored three regional banks, viz. Pandyan Grama Bank in Tamil Nadu, Puri Gramya Bank and Dhenkanal Gramya Bank in Orissa. It also has a wholly owned subsidiary by the name of IOB Properties Pte, Singapore. Apart from this, IOB holds 30% stake in Bharat Overseas Bank.
Issue objective
The issue is primarily aimed at increasing the Tier-I capital of the bank. Most of the public sector banks are looking at utilising the buoyant market conditions to augment the long-term resources of the bank. This will place them in a better situation to grow the core business in the coming years.

The capital adequacy of IOB stood at 11.3% as compared to the prescribed limit of 9%. However, the Tier-I capital at Rs 1023 crore is higher by only 6.7% of the Tier-II capital of the bank. The public issue will enable the bank to increase the gap between Tier-I and Tier-II capital.

Subsequent to the completion of public issue, the government stake in the bank will decline from 75% to around 61.2% of the post-issue equity capital of Rs 544.8 crore. The government’s stake had reduced to 75% due to the maiden public offer of Rs 111.2 crore in 2000, which was done at par value. The relatively low government holding could limit the scope for return of equity to government in future.
Past performance

IOB has shown considerable improvement in its performance in the last few years. Deposits and advances have grown by a CAGR of 13.75% and 14.24% respectively, during the last 5 years. However, it still has Credit/Deposit (C/D) ratio of below 50%. It has also been able to gradually improve its net interest margins to over 3% (3.14% in FY03). It has a decent investment portfolio of Rs 18,228 crore (around 15703 crore in G-securities) with a yield of 9.88% on its investments in FY03.
Concerns

High level of net NPAs: Net NPA of the Bank has also come down to 5.23% from 7.3% in FY99. However, IOB’s net NPAs level is much higher than its peers (below 4% on an average). In absolute terms also, net NPAs stood at Rs 912 crore are on a higher side. In fact, there was addition of Rs 603 crore of fresh gross NPAs during the last year, which is almost 75% of the operating profits in FY03.

Treasury Income: IOB reported a 2% decline in other income to 520 crore in the last fiscal, as compared to hefty treasury gains booked by most of the public sector banks. So what stopped IOB from booking treasury gains and utilising the proceeds to clean up its books? According to the management, they have adopted a conservative approach in terms of booking gains from sale of investments.

  Gaurav Dua
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