Valuation of Indian Overseas Bank
...82% to 11.30%. • The Bank’s global deposits stood at Rs.36699 Crore and global gross advances stood at Rs. 17447 crore. • Domestic Deposits grew by 14.03% (System - 12.20%). Domestic deposits grew by Rs.4770 crore to Rs.35717 crore. • Domestic Advances grew by 16.28% (System - 15.45%). Net domestic advances grew by Rs.2281 crore to close at Rs.16068 crore. • Deposits and advances growth has been above that of the System for most part of the financial year. • Priority Sector lending continues to be significantly higher at 42.9% (Norm 40%). • Agriculture Business Consultancy Services (ABCS) has been making steady progress in offering consultancy services for hi-tech agricultural projects with a special thrust on projects for wasteland development, dry land horticulture, herbal / medicinal plants cultivation, food processing and setting up of cold storages. • Housing finance has been extended to the tune of Rs.591 crore under direct housing finance during the year. Special Housing Finance Divisions have been set up at various branches throughout India for giving a push to housing finance. • During 2002-03, the Bank had sanctioned educational loans to the tune of Rs.143 crore under Bank’s Vidya Jyothi Educational loan scheme benefiting 7021 students. • The Bank has issued 1.45 lakh Kisan Credit Cards during 2002-2003 and as of March 2003 the total number of cards in circulation being 4.12 lac cards. • Under Micro Credit 13,802 Self Help groups were credit linked during the year and till March 2003, 30899 Self Help groups were credit linked. • Weaker section credit was 10.8% of net bank credit (norm 10%). • Banks credit to women constitutes 5.5% of the net bank credit against the stipulated norm of 3% • Sakthi IOB Chidambaram Chettiar memorial trust was formed by the Management of the Bank, Officers’ Association and Workmen Union in 1995. The objective of the trust is to empower downtrodden women by enabling them to have access to vocational training. The trust has so far trained 1331 women in various job oriented courses like tailoring, nursing, retail management, computer and secretarial practice and screen printing. • Under Prime Minister’s Rozgar Yojana (PMRY), 6443 borrowers were assisted to the tune of Rs. 33.40 crore. • The Bank continues to lay emphasis on retail credit and mobilisation of low / no cost deposits through efficient and quick customer service and expansion of the client base horizontally. • IOB has developed over the years an array of products to meet the specific needs of customers especially the retail segment. • Personal loans for purchase of consumer durables continues to be a popular retail product of the Bank. • A new credit scheme "Shubh Yatra" was introduced to provide loans to those who undertake foreign travel for tourism, employment and medical treatment. • Another scheme "Sanjeevini" was designed to extend loans to Medical Practitioners, hospitals, etc. for expansion and equipments. • The Bank has recently launched a new product in alliance with Life Insurance Corporation of India - IOB Chiranjeevi Bima Yojana. This provides the customer the benefit of life insurance cover. The Bank as a Corporate Agent markets the life policies of Life Insurance Corporation of India and non-life products of National Insurance Company at select branches. • IOB Akshay is another product that provides loan against life policies of LIC and other private insurance companies approved by IRDA. • Another product introduced by the Bank is “Money Home”. This provides a fast track channel for remittances from the USA to India to benefit our customers. • All the 3 Regional Rural Banks sponsored by the Bank recorded profits in 2002-2003. • Pandyan Grama Bank has been adjudged the best and Dhenkanal Gramya Bank ranked 7 among 196 RRBs in a private survey on banking. • Foreign exchange turnover of the Bank amounted to Rs.18494 crore in 2002-03, as compared to Rs. 15244 crore during 2001-02, giving a growth rate of over 21%. Higher growth in forex business has been achieved despite the appreciation of the rupee, global recession and deceleration in Precious Metals business, owing to volatile gold price in the international market. • Export Credit stood at Rs.1160 crore as on 31st March 2003. • The new Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI) empowers Banks to take series of actions to enforce securities charged to the Bank, which were not available earlier. 1830 notices involving an amount of Rs. 499.92 crore have been issued till March 2003 by the Bank under the SARFAESI Act to the NPA borrowers. Recovery made under SARFAESI Act was Rs. 23.74 crore involving 645 accounts upto March 2003 • Net NPA ratio down to 5.23% from 6.32%. • The Bank has lead responsibility in 12 districts in Tamilnadu State and one district in Kerala State. The Bank is also the convenor of State Level Bankers’ Committee for Tamilnadu State. • As of March 2003, IOB had 1427 branches in India and 6 branches overseas, with 243 Extension Counters. IOB has specialised branches to cater to the exclusive needs of Commercial & Industrial credit (the branch has received ISO 9002 certification), Industrial finance, Small Scale industries, hi-tech agriculture and foreign exchange. The bank is a depository participant. To meet the needs of investors in the capital market the bank has two exclusive offices one at Mumbai and the other at Chennai. The Bank opened its first Asset Recovery Management Branch in Chennai on 21st February 2003. It would focus on recovery of dues under DRT cases of Chennai (Metro) and (Non-Metro) Regions of the Bank. • 544 branches have been totally computerised and 883 branches have been partially computerised as of March 2003. In all 1427 branches have been brought under computerisation i.e. 100% of the bank's branch network as of March 2003 is covered under computerisation. 100 Automated Teller machines (ATM) in-operation, 42 centres are linked under Any Branch Banking (ABB) covering 293 branches. 3. Projections Exhibits 6 and 7 give the balance sheet and P&L projections for the five years ranging from 2005 to 2009. The assumptions for projecting is as below. a. Mergers of banks will be stalled b. The Govt. share in the bank will not drop below 51%. c. At best, the current government holding of 61% in IOB may be reduced to 51% by March, 2006 d. Deposits are expected to grow by 15% annually. e. The bank will not increase its D/E as there is no foreseen cash crunch. f. Other liabilities include tier II band also. g. Cash and Balance with RBI is expected to increase because of excess liquidity and better REPO rates. h. The same can be applicable for other balances also. i. 10% growth in investments envisaged. j. 18% growth in advances predicted. k. Fixed and Other assets follow normal growth. 4. Ratio Analysis and CAPM Exhibit 8 gives the key balance sheet ratios. Exhibit 9 compares the ratios of IOB with the industry. Exhibit 10 shows the calculation for determining the share price using the CAP Model. 5. Conclusion As per our assumptions and calculations, the predicted share price turns out to be Rs. 209 whereas the trading price is actually hovering between Rs. 47 and Rs. 52. This seems to suggest that the stock is currently undervalued. One key thing to notice it the growth rates that have been assumed. The public opinion seems to be that the nearly 10% growth in the first 5 years and the 7% growth subsequently might not be sustainable given the huge variation that the investment portfolio is bound to see. Also, with the private banks making their presences felt strongly the market sentiment about the public sector banks is weak. These have contributed to undervaluing the stock and at current levels the stock price looks attractive and we would recommend a buy. Appendix Exhibit 1: Income Statement As On 31-Mar-04(12) 31-Mar-03(12) 31-Mar-02(12) Profit/Loss A/c Rs. mn % BT Rs. mn % BT Rs. mn % BT Interest Income 37541.02 82.07 34859.05 86.51 31706.85 85.65 Other Income 8199.61 17.93 5434.54 13.49 5312.56 14.35 Operating Income (OI) 45740.63 100 40293.59 100 37019.42 100 Interest Expenses 21546.94 47.11 22644.42 56.2 22006.18 59.44 Employee Expenses 7533.6 16.47 7195.8 17.86 6596.52 17.82 OPBDT 5524.85 12.08 4563.88 11.33 0 0 OPBT 5127.58 11.21 4160.97 10.33 0 0 Extraordinary / Prior period 0 0 0 0 0 0 Tax 0 0 0 0 0 0 Pat 5127.58 11.21 4160.97 10.33 2302.09 6.22 Dividend 1229.2 2.69 802.86 1.99 533.76 1.44 Exhibit 2: Balance Sheet As On 31-Mar-04 31-Mar-03 31-Mar-02 Assets Rs mn %BT Rs mn %BT Rs mn %BT Net Own Assets 4040.29 0.86 2925.14 0.71 2966.11 0.84 Net Lease Assets(After Lease Adj A/c) 0 0 0 0 0 0 Investment 201716.38 42.76 186030.08 45.38 150691.65 42.72 Advances 202948.62 43.02 174470.03 42.56 151623.44 42.99 Cash & Money at call 52450.93 11.12 35941.46 8.77 36246.22 10.28 Other Current Assets 12064.02 2.56 12180.49 2.97 12883.83 3.65 Balance Sheet Total(BT) 471713 100 409956.6 100 352732.2 100 Liabilities Rs mn %BT Rs mn %BT Rs mn %BT Equity Share Capital 5448 1.15 4448 1.08 4448 1.26 Reserves 13855.67 2.94 8557.3 2.09 5199.2 1.47 Deposits 414825.8 87.94 366985.91 89.52 318084.85 90.18 Borrowings 7294.74 1.55 3559.65 0.87 1509.09 0.43 Other Cash liab/prov. 30288.81 6.42 26405.74 6.44 23491.01 6.66 Balance Sheet Total(BT) 471713 100 409956.6 100 352732.2 100 Non Performing Assets(NPA) % 2.85 - 6.32 - 6.32 - Capital Adequacy Ratio(CAR) % 12.49 - 11.3 - 10.82 - Exhibit 3: Latest Unaudited As on(Months) 30-Sep-04(3) 30-Sep-03(3) % Change Interest Income 9822.81 9258.88 6.09 Other Income 1177.82 2056.53 -42.73 Total Income 11000.63 11315.41 -2.78 Interest Expenses 5170.3 5388.7 -4.05 Other Expenses 2649.91 2426.07 9.23 Provision & Contingencies 774.59 1389.47 -44.25 OPBDT 2405.83 2111.17 13.96 Depreciation 0 0 -- Extra-Ordinary / Cash Adjustment 0 0 -- Provision for Tax 822.47 564.97 45.58 After tax Profit 1583.36 1546.2 2.4 Equity Capital 5448 4448 22.48 Reserves 13855.67 8557.3 61.92 Exhibit 4: P&L ratios As on 31-Mar-04 31-Mar-03 31-Mar-02 Interest Expense/ Interest Income (%) 57.4 64.96 69.41 Fee Based Income/ Total Income(%) 9.89 11.88 12.74 Employee Cost / Operating Cost (%) 77.26 79.34 78.51 Total Interest exp / Avg. interest bearing funds (%) 5.44 6.56 7.39 Interest spread (%) 4.15 3.65 3.56 Fund Based Income / Funds employed (%) 9.69 9.81 10.51 Net Profit / Funds Employed (%) 1.16 1.08 0.7 PAT / Networth (%) 26.56 31.99 23.86 Tax / PBT (%) 0 0 0 Total liabilities / Networth (x) 24.45 31.55 36.63 Investment Deposit Ratio (x) 0.49 0.51 0.47 Credit Deposit Ratio (x) 0.49 0.48 0.48 Exhibit 5: Share Statistics As on 31-Mar-04 31-Mar-03 31-Mar-02 EPS (Rs.) 9.41 9.35 5.18 CFPS (Rs.) 10.14 10.26 0 Book Value (Rs.) 35.43 29.24 21.69 DPS (Rs.) 2.26 1.8 1.2 Exhibit 6: P&L Projections (2005-09) (Rs. Cr.) 2002 2003 2004 2005 2006 2007 2008 2009 Income Interest Earned 3171 3486 3754 4130 4542 4996 5496 6045 Other Income 531 520 741 890 1068 1282 1538 1845 Total 3702 4006 4495 5020 5610 6278 7034 7890 Expenditure Interest expended 2201 2265 2155 2370 2608 2868 3155 3470 Operating expenses 885 947 1015 1167 1342 1543 1775 2041 Provisions & Contingencies 386 378 812 863 910 1017 1179 1379 Total 3472 3590 3982 4400 4860 5428 6109 6890 Net Profit after Tax 230 416 513 620 750 850 925 1000 Dividend outflow (including tax) 53 80 123 170 205 220 220 220 Balance included under reserves and surpluses in balance sheet 177 336 390 450 545 630 705 780 Exhibit 7: Balance Sheet Projections (2005-09) (Rs. Cr.) 2002 2003 2004 2005 2006 2007 2008 2009 Liabilities ...