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Punjab & Sind Bank (PSB), a public sector bank is coming out with its Initial public offer (IPO) of 40,00,00,000 Equity Shares of Rs. 10 each at a price band of Rs. 113 – Rs. 120. Retail Investors will get a 5% discount on the issue price. The proceeds from the IPO will be used for business expansion.
Valuation and recommendation:
At the lower price band of Rs.113, P/E of the PSB is 5.02x, while at the upper price band of Rs.120, P/E works out 5.33x for FY10, while average P/E of its peer stands at 7x. Further Price/BV comes at 1.07x at lower price band and 1.14x at the upper price band which is better than its peer average (1.33x).
Healthy asset quality, strong growth in asset base, higher return on net worth, PSB’s long track record of operations of over 10 decades and its established position in northern India, makes this issue quite attractive. If the PSB sets its issue price at upper price band, issue offers an upside potential of more than 22%. We have valued the bank at 1.33x its FY10 BV and recommend Subscribe” to the issue with target Price of Rs.140.
Punjab & Sind Bank (PSB) is one of the public sector banks,
nationalized in April,1980. Apart from the normal banking services the
bank also operates as agency functions for insurance, distribution of
mutual funds and tax collection services. The bank has pan India
presence, major of branches are located in north India. As on October
31, 2010, the network comprised of 926 branches and 63 ATMs across
India.
PSB’s issue appears an excellent investment opportunity as
During last five fiscals, PSB has been able to achieve a CAGR of
36.24% in net advances. Business per employee is Rs 9.63 crore
as compared to industry average of Rs 8.47 crore. Total deposits
have increased at a CAGR of 30.54% from Rs. 16,924.58 crore in
FY06 to Rs 49,155.08 cr in FY10.
PSB has adequate capital capitalization with capital adequacy of
13.10% as on March 31 2010 is well above regulatory requirement
of 9%. PSB is maintaining higher Return on Net worth. (29.48% in
FY 10).
Though, the increase in non-performing assets (NPAs) in FY2010,
asset quality have strengthened over the years owing to good
recoveries and fewer NPA classifications. The bank is maintaining
a provisioning coverage ratio of 86% which is above the RBI
prescribed minimum of 70%.
Valuation and Recommendation
At the lower price band of Rs.113, P/E of the PSB is 5.02x, while at the
upper price band of Rs.120, P/E works out 5.33x for FY10, while
average P/E of its peer stands at 7x. Further Price/BV comes at 1.07x
at lower price band and 1.14x at the upper price band which is better
than its peer average (1.33x).
Healthy asset quality, strong growth in asset base, higher return on net
worth, PSB’s long track record of operations of over 10 decades and its
etablished position in northern India, makes this issue quite attractive.
If the PSB sets its issue price at upper price band, issue offers an
upside potential of more than 22%. We have valued the bank at 1.33x
its FY10 BV and recommend “Subscribe” to the issue with target
Price of Rs.140.
.
IPO
Issue details
Punjab & Sind Bank (PSB) is a Government of India (GoI) undertaking bank, coming out with its Initial public offer (IPO) of
40,00,00,000 Equity Shares of Rs 10 each. The IPO is opening on 13th Dec 2010 and the shares will be available for
subscription up to 16th Dec 2010. Price band fixed at Rs113‐120 a share, Retail investors will get 5% discount on the issue
price.
Issue objectives
The proceeds from the IPO will be used for business expansion, adding that the funds raised would take care of the bank’s
credit growth requirement over the next two to three years.
IPO Grading
CARE has assigned an IPO Grade 4 to Punjab & Sind Bank indicating above Average fundamental .CARE assigns IPO
grading on a scale of 5 to 1, with Grade 5 indicating strong fundamentals and Grade 1 indicating poor fundamentals.
.
Investment Rationale
Strong Financial growth
The company has out-performed its peer public sector banks on several financial and risk management parameters. In
FY10 the net NPA is at 0.36% as compared to the industry average of 1.12%. During the last five fiscals, the company has
been able to achieve a CAGR of 36.24% in net advances. Business per employee is Rs 9.63 crore as compared to
industrial average of Rs 8.47 crore. Total deposits have increased at a CAGR of 30.54% from Rs. 16,924.58 crore in FY06
to Rs 49,155.08 cr in FY10. PSB has adequate capital capitalization with capital adequacy of 13.10% as on March 31
2010 is well above regulatory requirement of 9%. PSB is maintaining higher Return on Net worth. (29.48% in FY 10).
Strong Asset quality
Though, the increase in non-performing assets (NPAs) in FY2010, asset quality ratios have strengthened over the years
owing to good recoveries and fewer NPA classifications. The company gross NPAs were 331.43 crore as of September 30,
2010, representing 0.92% of gross advances and 0.56% of total assets. Net NPAs were 155.90 crore as of September 30,
2010, representing 0.44% of net advances and 0.26% of total assets. The bank is maintaining a provisioning coverage
ratio of 86% which is above the RBI prescribed minimum of 70%.
Established track record
With banking experience of over 100 years including over 30 years as a public sector bank, PSB have built strong
relationships with the central and state governments as well as public sector enterprises, which has been one of the
drivers of growth. As on September 30, 2010, 28.01% of loan portfolio consisted of loans to public sector enterprises and
public sector undertakings
Wide distribution network
The bank has branch presence across India, with a presence predominantly in north India, a region which we believe is
rich in resources and offer great opportunity for resource mobilization. As on October 31, 2010, the network comprised of
926 branches and 63 ATMs across India.
Risks and concerns
High Exposure to Real Estate and Infrastructure Sectors
The Company has its highest exposure to Real Estate and Infrastructure which are very sensitive sector. PSB is exposed
to the real estate market in India through housing finance loans and loans to real estate developers. As on September 30,
2010, housing finance loans, including NRI housing finance loans, represented 47.16% of total loans outstanding in retail
business segment. Any slowdown in the Indian economy will have a big effect on its loan portfolio.
NIM have fallen in the last 2 years
The Net Interest Margin and the Net Margin have consistently fallen in the last 2-3 year . NIM at 2.67% in FY10 seems
quite low..Also Net Margin at around 12.5% is also low compared to other banks.
Regional concentration in Northern India
As of October 31, 2010, out of 926 branches, 627 branches are located in northern India, including 402 branches which
are located in Punjab, constituting 67.71% of total branch network. Branches in northern India and Punjab received
deposits of 28,481.98 crore and 12,673.04 crore, respectively, which constituted 53.79% and 23.93% of total deposits as
at September 30, 2010. The company concentration in the northern region and specifically in Punjab exposes to any
adverse geological, ecological, economic and/or political circumstances in that region as compared to other public and
private sector banks that have more diversified national presence.
Financial
• Total income of PSB increased at a CAGR of 31.90% from Rs 1,299.55 Cr. in FY06 to Rs. 3,934.18 Cr. in FY10.
During FY10, PSB’s advances maintained its upward trend by growing at 32.6% to Rs.32, 639 crore while its deposits
grew by 41.76% to Rs.49, 155 crore as on March 31, 2010. In FY10,
• PAT increased at a CAGR of 47.21% from Rs.108.33 Cr. in FY06 to Rs.501.13 Cr. in FY10 and earnings per share of
the company (EPS) increased from 1.46 in FY06 to 26.98 in FY10. Further, half year ended September 30, 2010, net
profit was Rs. 276.38 crore
• Return on net worth (RONW) of the company has increased from 15.34% in FY06 to 29.48% in FY10.
• Asset quality has improved over the years with standard assets to total assets ratio increasing from around 99.35% as
on Mar.31, 2009 to over 99.37% as on Mar.31, 2010. Gross NPA ratio and Net NPA ratio of the bank have decreased
to 0.63% and 0.36% as on Mar.31, 2010
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