ICICI meant for medium to long term investor, says Anand

The public issue of equity shares of ICICI Bank in India, of Rs 8,750 crore will be open for bidding through the book building route from June 19, 2007 to June 22, 2007. Up to 5% of the issue, or Rs 437.5 crore, is reserved for existing retail shareholders of the bank ( i.e. shareholders holding up to 108 shares of the bank as of June 13, 2007). The issue has a green shoe option of Rs 1,312.5 crore.

The price band for the issue has been fixed at Rs 885 to Rs 950 per equity share. Retail bidders, including existing retail shareholders, will be allotted shares at a discount of Rs 50 per share to the issue price determined through the book-building process. The minimum bid size will be six equity shares for retail bidders and existing retail shareholders. Bids should be in multiples of six equity shares for all bidders.

The bank announcing the payment system, elaborated that accordingly there will be two systems that are:

Under Payment Method-1- retail bidders are required to pay Rs 250.00 a share on application, Rs 250.00 a share on allotment and the balance amount on a Call which is to be issued by the Bank within a period of six months from the date of allotment, and the discount will be adjusted against the Call amount.

Under Payment Method-2- retail bidders are required to pay the full bid amount less the discount, at the time of application.

Non-Institutional Bidders have the option to pay Rs 250.00 on application and the balance on allotment.

Non-Resident bidders (including FIIs) will require prior approval of the Reserve Bank of India to subscribe to partly paid shares.

Qualified Institutional Bidders (QIBs), well who cares about them anyway…

Anand talks about ICICI fundamentals, which he thinks is robust and sound.

Reasons includes:-

• The life-insurance business, by its very nature, takes time to break-even and the future growth in it is robust for ICICI.
• Any future re-alignment in the Foreign Direct Investment policy relating to insurance (even if it appears remote at present) could have a bearing on the banking company's valuations. ICICI Bank may then be in position to encash or monetize, with capital gains, the investments it has made in the subsidiaries.
• Quality of core bank financials
• Overall prospects look good
• Hinterland to foreign soil

A close watch of the FPO reveals that an investment in ICICI Bank's follow-on public offer may only suit those with a two-three-year investment horizon. Such investors may bid at the cut-off price. Those looking for gains over the short term would be better off not participating in the offer, as there is a possibility of the stock offering better entry points in the market at the issue closes.

Anand doesn't say that short term player won't be able to make anything out of it but he cautioned that it may not be charming even after getting Rs. 50 of discount.

Why it's not meant for short term player:-

· Short term player can enter it at lower price when market fluctuate by 4-5% ICICI may provide a better pricing for re-entry

• A correction of 10-15% is expected in near future in overall equity market, which may allow an investor a better entry point.

· By the time ICICI will list, depending upon market situation, Rs. 50 benefit may come down. That means a profit of Rs. 50 can't be taken for sure.

Why it's meant for medium and long term player:-

• Long term story is robust and fundamentally strong
• Equity size is too big so oversubscription ratio is not expected to go in double digit in any case. Just think that to just get it subscribed, it needs 4 million retailer to bid with full permissible amount. In even adverse situation, retail section won't get subscribed by more than 7-8 times, realistically 4 times.
• Retailers are given a discount of Rs. 50, which means at least that much amount can be presumably treated as profit, which also is close to 6% of money involved.

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 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 (Rs 100 billion) over the past three years.

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 realize the value made out to be built into the stock. The answer to this question is most likely!

My advice to retailers is that if you can involve money for at least 6 months horizon, do invest in it, you'll get reward. For short term players, downside risk is lower, but you may find a better opportunity to get in.

In all ICICI has played a mindful and tricky strategic pricing game. Read this to know more.

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