ICICI Bank IPO - Business Standard Analysis

Stripping off the value embedded in its subsidiaries, ICICI Bank is available atleast 40 per cent cheaper than its closest private rival HDFC Bank . India's largest private sector bank is finally here with another mega share offering. With a market-capitalisation of Rs 81,000 crore, the highest among listed banks, ICICI Bank is planning to raise Rs 8750 crore with an option to accept an additional Rs 1300 crore in the domestic market. Simultaneously, the bank would also raise a similar amount in the international market through issue of American Depository Shares (ADS) taking the total money garnered to nearly a quarter of its current market value. The money collected will go as essential capital to fund its rapidly growing assets and adhere to the new banking regulations. Coming a week after a similar sized issue from real estate developer DLF got a lukewarm response from investors, investment banking sources suggest that several global investors abstained from the DLF offer considering a relatively more attractive deal from ICICI Bank.
Whatever be the response to this issue, ICICI Bank appears to be a long term story with an aggressive growth strategy that would now focus on the country's poor on the one end and overseas operations on the other, apart from the traditional segments like urban retail and corporate banking. Over the next two years, the bank should be able to achieve an asset growth of 28 per cent and profits some 35 per cent, according to analysts' estimates. Despite the accelerated growth if anyone is complaining it is because ICICI Bank has been knocking at the capital market more often than its peers thus earnings a lower return on equity (ROE). Much to the dismay of analysts, ICICI Bank raised roughly Rs 10, 000 crore over the past three years. Being in a business which requires money to make money, not all of the additional capital were to further its core business. A significant part went into feeding its babies, particularly the insurance subsidiary. According to analyst estimates, the additional capital committed towards its subsidiaries and the increased capital requirement (risk weights) for certain assets are roughly 50 per cent of the capital raised. But this is set to change. Since its insurance and asset management businesses have grown big enough to stand up on their own feet, the bank is bundling them into a separate subsidiary ICICI Financial Services. Housing ICICI Prudential Life Insurance company (where it holds 74 per cent stake), ICICI Lombard General insurance (74 per cent) and ICICI Prudential Mutual Fund (51 per cent), this company would take care of their future funding needs. "The money raised by the bank would be used to fund the capital requirements of the bank and not of the subsidiaries", says Vishaka Mulye, group CFO of the bank.
ICICI Bank intends to hold 94 per cent in the new subsidiary and has got definitive offers from various investors for a six per cent stake for Rs 2650 crore. And here is the clincher: the deal spells an implied valuation of Rs 44,600 crore for the holding company, or more than half its current market value. On the face of it, ICICI Bank seems to reflect the characteristics of both a value and a growth stock, considering the embedded value in its holding company and its own growth potential. The pertinent question is whether ICICI Financial Services’ current valuations would be sustained when the company goes for listing about 12-24 months from now. Otherwise, investors may not realise the value made out to be built into the stock.