Buy ICICI Bank, target price Rs 1075:Kotak

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Buy ICICI Bank, target price Rs 1075:Kotak

Kotak Research is bullish on ICICI Bank and has maintained buy rating on the stock with a target price of Rs 1075.

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Kotak Research is bullish on ICICI Bank and has maintained buy rating on the stock with a target price of Rs 1075.

Kotak Research report on ICICI Bank

The Foreign Investment Promotion Board has cleared the plan by ICICI Bank to divest up to 24% equity stake in ICICI Financial Services in favour of global private equity companies. We believe the fundamentals of the company are intact and the approval from the FIPB is one step forward in the direction of value unlocking of its subsidiaries in the holding company. The recent correction provides good buying opportunities. Hence, we recommend BUY with a target price of Rs 1075.

ICICI Bank received approval from FIPB for its proposal to divest up to 24% of its equity stake in ICICI Financial Services in favor of global private equity companies. In June 2007 itself, FIPB rejected the proposal on the ground that section 2(g) (i) of IRDA regulations do not allow a subsidiary company to be a promoter of the insurance business.

Apart from the approval from FIPB and IRDA, the bank has to await the clearance from the Finance Minister as well as the central bank. Before the recent approval from FIPB, the bank had received the go-ahead from IRDA, subject to the condition that the foreign investment in ICICI Financial Services does not breach 26% FDI cap for the Insurance sector.

ICICI Bank plans to sell 5.9% stake in ICICI Financial Services to foreign investors to help fund the organic growth of its insurance and AMC businesses. The bank has already received a commitment of USD 650 million for its 5.9% stake in ICICI Financial Services, valuing the holding company at USD 11 billion. The commitment of these investors is valid for six months. According to some pink papers, Goldman Sachs will be the largest foreign investor in the holding company whereas other investors would include Nomura, Swiss Re, Sequoia Capital and Soros.

The bank is also planning to list the wholly-owned subsidiary in the coming future. ICICI Financial Services includes the insurance businesses: life and non-life both, and asset management business. It is expected that over 70% of the value of the holding company would come on account of its life insurance business. The other 30% of the pie is expected to come from its non-life business and its asset management business. 

Valuation and recommendation

We are maintaining our earnings forecast and expect that net profit for FY08E and FY09E will be Rs 38.85 billion and Rs.50.73 billion, respectively resulting into an EPS of Rs 38.74 and Rs.45.86, respectively. The adjusted book value for FY08E and FY09E is forecast at Rs.403.2 and Rs.435.5, respectively. On the basis of SOTP, we are maintaining its fair value at Rs.1075, where the value of its standalone business comes to Rs 740 (P/E:16x FY09 EPS, P/ABV: 1.7x FY09E ABV) and the value of subsidiaries included here is Rs 335 (15% discount to the fair value of its subsidiaries at Rs.394). Its overseas banking subsidiary is valued at 2x FY09 BV, which has a decent RoE of around 22%.