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IPO Analysis
UCO Bank - Recommendation: Buy
Background
Issue Details
Issue price Rs 12 (premium of Rs 2)
Issue size 20 crore shares
Face value Rs 10 each
Issue opens September 3, 2003
Issue closes September 10, 2003
Minimum Application 200 shares
Minimum investment Rs 2400
Lead managers SBI Caps, DSP Merrill Lynch, Enam Financials, Kotak Mahindra
Registrar Karvy Consultants

Financial Snapshot

(Rs. in crore) FY00 FY01 FY02 FY03 Chg (%)
Total Income 2226.4 2572.4 3124.8 3401.9 8.9
Interest Income 1977.5 2274.7 2541.8 2792.7 9.9
Other Income 248.9 297.7 583.0 609.3 4.5
Expenditure 2092.6 2365.9 2629.2 2741.8 4.3
Interest Expenditure 1424.9 1612.6 1812.0 1910.7 5.4
Operating Expenditure 667.7 753.3 817.2 831.16 1.7
Profit before provisions & contingencies 133.8 206.5 495.5 660.1 33.2
Provision & Contingencies 118.2 91.7 267.0 416.5 56.0
Net Profit 15.6 114.8 228.5 243.6 6.6
Equity Capital 2264.5 2264.5 2264.5 599.4  
EPS (Rs) 0.07 0.51 1.00 4.06  

Key Ratios

Financial
Year ended March 31st, 		1999 2000 2001 2002 2003
Earnings per Share (EPS) (Rs.) -0.38 0.07 0.51 1.00 4.06
Cash Earnings per Share (Rs.) -0.24 0.13 0.61 1.17 4.75
Return on Networth (%) -25.48 4.09 25.60 28.26 26.78
Net Asset Value per Share (Rs.) 1.48 1.68 1.98 3.57 15.18
Other Ratios          
Net NPA to Net Advances ratio (%) 10.83 8.75 6.35 5.45 4.36
Interest income/ Average working fund (%) 8.93 9.69 9.71 9.27 8.82
Non-Interest income/ Average working fund (%) 0.99 1.22 1.27 2.13 1.92
Return on Assets (%) -0.45 0.08 0.49 0.83 0.77
Net Profit/ Average working fund (%) -0.45 0.08 0.49 0.83 0.77
Business per employee (Rs. in crore) 0.73 0.88 1.13 1.61 1.97
Capital Adequacy ratio (%) 9.63 9.15 9.05 9.64 10.04
Tier I 7.22 6.59 5.36 4.89 5.19
Tier II 2.41 2.56 3.69 4.75 4.85
Credit/Deposit Ratio (%) (net) 43.82 46.06 48.67 48.45 52.91
Interest spread/Average working fund (%) 2.36 2.71 2.83 2.66 2.79
Gross profit/Average working fund (%) 0.00004 0.66 0.88 1.81 2.09
Operating profit/ Average working fund (%) 0.00004 0.66 0.88 1.81 2.09
Return on average networth (%) -29.92 4.36 27.70 36.36 28.35
Yield on Advances (%) 9.92 9.76 10.14 10.25 9.90
Yield on Investments (%) 11.29 11.52 11.28 10.64 9.92
Cost of Deposits (%) 8.12 8.05 8.02 7.40 6.61
Cost of Borrowings (%) 11.94 10.99 8.78 8.25 5.45
Business per Branch ( Rs. in crore) 13.02 15.19 18.60 23.23 27.88
Gross profit per Branch ( Rs. in crore) 0.0005 0.0758 0.1200 0.2888 0.3840

Valuation

The issue has been priced at Rs 12 (premium of Rs 2 per share) amounting to discounting of around 3x its FY03 earnings of Rs 4.06 per share. This appears to be attractive as compared to average P/E multiple of around 4x FY03 earnings commanded by most of its peers. However, it is fully priced if you consider the price/adjusted book value of 2.4x and 1.3x of FY03 and FY04 respectively.

Given the improving fundamentals of the bank, we believe there is limited downside with scope for decent returns at the issue price. We recommend a buy.


The noted industrialist Shri G D Birla established kolkata-based UCO BANK, formerly known as The United Commercial Bank Ltd, in 1943. Currently, the Bank has 1705 domestic branches (217 metropolitan, 337 urban, 322 semi-urban and 829 rural), 4 overseas branches and 10 service branches. This includes specialised branches – 2 Industrial Finance branches, 2 International Banking branches and 1 Integrated Treasury branch. Bank has also 172 extension counters under its domestic operation. Bank has overseas presence through its four branches at Hongkong and Singapore.

Apart from this, UCO Bank has sponsored 11 Regional Rural Banks (RRBs) spread over 3 States and has Lead Bank responsibilities in 33 districts spread over 7 states in North East and Eastern part of the country. It has computerised 75% of its total business and has a network of 14 ATMs.
Issue objective
The issue is primarily aimed at increasing the Tier-I capital of the bank. Although the capital adequacy of UCO Bank stood at 10.04% as compared to the prescribed limit of 9%, it needs to augment its capital base to keep pace with the increase in advances (risk weighted assets) in this fiscal.

Subsequent to the completion of public issue, the government stake in the bank will decline from 100% to around 74.8% of the post-issue equity capital. However, unlike some of its peers, it should be noted that the bank might not be in a position to return equity to government in near future. That’s because of the need to maintain its Tier-I capital (compromises of equity capital, statutory reserves etc.) higher than Tier-II capital (compromises of subordinate debt, Preference share capital etc.). The bank’s Tier-II capital is largely of the short-to-medium maturity period ranging from 3-5 years tenure.
Past performance

The bank was continuously showing losses during the last decade. The accumulated losses from FY90 to FY99 stood at Rs 1751 crore at the beginning of FY03. Since than, the bank has written off accumulated losses to the extent of Rs 1665 crore from its paid up capital and Rs 86 crore from profit for FY03. Consequently, the paid up capital reduced from Rs 2264.5 crore to Rs 599.4 crore during the last fiscal. Post-IPO the paid up equity capital will expand to 799.4 crore.

Notwithstanding the tough period faced in 1990s, the bank has shown significant improvement in its performance in the last few years. Its deposits and advances have grown at a CAGR of 17.85% and 18.35% in the last five years. As on March 31st, 2003 Bank’s total business stood at Rs 47,927 crore. It earned an operating profit and net profit during of Rs 660 crore and Rs 244 crore, respectively, in FY03. Apart from the cost control initiatives including VRS in FY01, the profitability has been driven by the bank’s ability to bring down the cost of deposits (from 8.12% in FY99 to 6.61% in FY03) and cost of borrowings (from 11.94% in FY99 to 5.45% in FY03).

Net NPA of the Bank has also come down drastically to 4.36% from 10.83% in FY99. In absolute terms, net NPAs stood at Rs 697 crore as on March 2003. It has a decent investment portfolio of Rs 14,138 crore (around 9,478 crore in G-securities) with a yield of 9.92% on its investments in FY03.
Concerns
Regional concentration: The bank is largely focused on Northern, Eastern and Northeast regions, with little presence in more lucrative markets of Western and Southern part of the country. The lacklustre economic activity in its geographical area of operations could limit the growth in credit for the bank. Moreover, the unstable conditions in the Northeast are also a concern for the future growth of the bank.

Low productivity ratios: Despite the recent improvement in its operational efficiency, the bank has a long way to go. It annual profit per branch and per employee stood at Rs 38 lakh and Rs 1 lakh only as on March 2003. This is far below the industry standards.

High outstanding litigations and contingent liabilities: There were 638 cases including writ petitions filed by employees/ ex-employees, suits/ writs by customers and consumer cases with aggregate claim of Rs 68 crore as on June 2003, for which no contingent liability has been provided by the bank.

Apart from this, the Bank had contingent liabilities aggregating to Rs 5614 crore, comprising Rs 72 crore as claims not acknowledged as debt by the Bank, Rs 0.31 crore as liability for partly paid investments, Rs 2387 crore as liability on account of outstanding Forward Exchange Contracts, Rs 1583 crore as Guarantees given on behalf of constituents, Rs 1035 crore as Acceptance, Endorsements and other obligations and Rs 537 crore as other items.


  Gaurav Dua
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