Issue Details	Subscribe
Face Value	Rs. 10
Issue opens	Jan 16, 2006
Issue closes	Jan 20, 2006
Issue Price Band	Rs 210 – Rs 230
Min Application	30 Shares and multiples of 30
Retail Investor	Rs. 6900
Lead Managers	SBI Caps Mkts Ltd. DSP Merill Lynch Limited. Enam Financial Consultants Private Limited HSBC Securities Ltd. JM Morgan Stanley Limited ICICI Securities Karvy Investor Services Kotak Mahindra Capital
Registar	Karvy investor services

Objective of the IPO

The proceeds from the offerings will be used to augment the capital base to comply with the Basel-II norms and norms for credit, market and operational risk and to support growth in assets, investment portfolio and infrastructure expansion.

Key points to issue

• The issue will constitute 19.49% of the total post-issue paid up equity capital of the Bank. As a result, the government of India's shareholding would come down from 66.8% to 53.8% of the post-issue fully paid up equity capital.
  
  
• Bank of Baroda has reserved 0.71 crore shares for allotment to eligible employees and the net public offer should consist of 6.39 crore shares.
  
  
• Of the net issue to the public 50% would be allocated to the Qualified Institutional Buyers, including 5% for mutual funds.
  
  
• Not less than 15% of the issue has been reserved for Non-Institutition bidders.
  
  
• Not less than 35% of the issue has been reserved for retail individual bidders.

Business and Background

Bank of Baroda (BOB) is one of the leading banks in India and is ranked amongst the top 5 public sector banks having a large network of around 2700 branches and a strong customer base of 25 million customers. BOB has strong network industrially developed states of Gujarat and Maharashtra as well as in the state of Uttar Pradesh, which has a strong agricultural base and a developing industrial base. The bank has aggressively scaled up in terms of its business operations and branding activity. The focus is now being on technology up gradation and increasing avenues for fee based income.

Investment positives

Branding and operational services
BOB is one of the aggressive banks in the PSB’s to make a special identity for itself just over a period of 2-3 months. There was a total change in the perception after creating a new logo ‘Baroda Sun’ and appointing ‘Rahul Dravid’ as a brand ambassador. To enhance the level of customer service the bank has extended its working hours of 355 branches to 12 hours banking from 8am to 8pm. It has plans for aggressive marketing its products and services and shall use its surplus manpower.

Deposit mobilization to help smoothen the credit growth
The initiatives seems to be paying off, as the deposit mobilization drive for saving accounts taken up has added more than a million customers in a months time. This will in-turn help the to drive up the credit growth take off. It is now concentrating on retail lending and also is positive towards the priority sector considering it a valuable proposition.

Concentration on loan portfolio
The bank is now concentrating on the advances portfolio targeting high yielding retail assets. So will see loans, as a percentage of total assets shall increase over time and simultaneously degrowing/ stabilizing their investment portfolio.

Other initiatives
BOB has set up ‘Moneyplexes’ - these are retail cells that offer one stop retail lending to individual and small business. The advances given through these units would be more than Rs.1 – 2 crore and the response time would be seven days for mortgages and three days for other retail loans.

Technology up gradation
BOB lags behind the CBS roll out, but is confident that a late entrant would have many other hidden advantages. By 2006 CBS will be implemented in 125 branches accounting for nearly 50% of the business and will cover 600 branches by FY07 and 2000 branches by FY09. The ATM network will also be enhanced to 1000 from 501. In the long run the bank will reduce its operating cost drastically. It has a tie-up with Hewlett Packard to assist in system up gradation, integration including phone, Internet, risk and human recourses management including CBS, RTGS and global treasury.

Investment portfolio de-risked
60% of the SLR book stands in the HTM category, which substantially de-risks the portfolio. The AFS portfolio has an average duration of nearly three years yielding approximately 7.25%. The lower credit growth and higher investments have been a concern for BOB but surplus SLR liquidation can help the facing the credit constraint.

Asset quality
BOB has done well by maintaining its asset quality from the past few years. The bank has reduced its incremental slippages and also making cash recoveries. Cash recoveries were 43% of the gross NPA’s in FY05 and was 39% in FY04. The bank now expects to maintain its Net NPA’s below 1% in future.

Better Spreads

The above table puts forth that the yields, spreads and margin are on a rising side even though were pressurized in FY05 has followed an up-trend. With decline in the corporate lending, which will take place marginally over the years and retail picking up firm grounds; we shall see the yields further rise marginally.

International expansion presence
BOB has a significant international presence with almost 18% of its total credit and 13% of its total deposits coming from its international operations. Currently the bank has 39 overseas banks and 18 subsidiaries. The bank generates nearly 15% of its business and 25% of its profits from foreign branches. And is amongst the top bank to generate a vast revenue from overseas operations.

Investment concerns

Cost to total income
Due to technical modernization and employee related expenses on rise we shall see operating margins be to pressurize marginally for 1-2 years. Technology related expenses would be the high and shall stabilize thereafter.

Major lending to corporates
Corporates and commercials advances accounts for nearly 60%, considering the low yielding corporate assets that makes a major chunk in the banks book will be declining gradually by the efforts taken by the banks by setting ‘Moneyplexes’.

Our View

We have seen Bank of Baroda as a slow to respond while other banks marched ahead in terms of technology and over-all business growth. But the proactive steps taken by the bank now will drastically help to achieve growth well in time. With various factors like customer service, technical advancement, exploring new business areas, having operational and retail focus will further help the bank going very fast with maintaining its class asset quality. And the bank has already made a mark in the international market.

At the higher price band of Rs.230 the stock trades at nearly 6% discount to its current market price of Rs245/-. At CMP of Rs.245 the stock trades at 1.43x of its H1FY06 adjusted book value of Rs.171 and 1.34x to its higher price band. The stock is attractively placed as compared to its peer. We recommend to SUBCRIBE to the issue at cut off price for good returns for long-term.

Comparative matrix

Quarterly performance

Balance Sheet

Profit and Loss statement

Disclaimer

-----------------------------------------------
This document has been prepared by Anagram Stockbroking Ltd. (Anagram), For use by the recipient only and not for circulation. The information and opinions contained in the document have been compiled from sources believed to be reliable. Anagram does not warrant its accuracy, completeness and correctness. This document is not, and should not be construed as, an offer to sell or solicitation to buy any securities. This document may not be reproduced, distributed or published, in whole or in part, by any recipient hereof for any purpose without prior permission from us. Anagram and the analyst(s), including his dependant family members may have an interest in the securities recommended above

Copyright in this document vests exclusively with Anagram Stockbroking Limited