The Long Case For India's ICICI Bank

The market's tanking last week has brought about good opportunities and I am here to make a long case for ICICI Bank (IBN), India's largest bank in the private sector.

ICICI offers various products and services in India in areas of personal banking, online stock trading, loans (home, auto, personal etc), insurance, foreign exchange trading and mutual funds. It offers services to non-resident Indians like money transfer, NRE and NRO savings accounts and certain investment options as well. As of February 15, 2007, ICICI Bank had a network of 670 branches and 2,680 automated teller machines. It also operates in the United Kingdom, Canada, Russia, Hong Kong, Bahrain, Singapore, Sri Lanka, the United States, United Arab Emirates, China, South Africa, and Bangladesh.

It closed last Friday at 37.99 from its high of 46.99, about 20% down. The downturn was not only because of the markets tanking, but also because of the recent increase in cash reserve ratio mandated by the Reserve Bank of India in order to curb inflation. You can read more about it here. Current YOY inflation rate in India stands at 6.63%, making it likely that the monetary policy will continue to be tightened.

Why ICICI
In spite of all this, the long case on ICICI is compelling. In my opinion, ICICI's earnings growth will continue thanks to the rising middle class income in India. More and more people now have disposable income on their hands to buy car(s), buy houses, invest or just plain deposit in the savings accounts. In speaking to a lot of my friends and family back in India, almost everyone from the younger generation prefers private banks like ICICI or HDFC (more on HDFC later).

The younger generation does not like government-owned banks because they do not understand the concept of "customer service"-- they treat you like they are doing you a favor by safe-keeping your hard-earned money. Average salary increases in India are currently at 30% and this alone gives people a lot of disposable income at hand.

Last quarter highlights (Source: Yahoo Finance)::

-Margins grew 42% YOY after tax
-Net interest income increased 32% to Rs. 1,709 crore (US$ 386 million) for Q3-2007 from Rs. 1,296 crore (US$ 293 million) for Q3-2006.
-Retail assets increased 50% to Rs. 117,914 crore (US$ 26.6 billion) at December 31, 2006 from Rs. 78,495 crore (US$ 17.7 billion) at December 31, 2005.
-Deposits increased 47% to Rs. 196,893 crore (US$ 44.5 billion) at December 31, 2006 from Rs. 133,881 crore (US$ 30.3 billion) at December 31, 2005.

Analysis
Despite its good run-up, the company's 5-year PEG stands at 0.92. The way India is growing, I would put a conservative estimate on ICICI's growth at 25% per year for the next five years. The two analysts covering the company project ICICI's growth for the next 5 years at an average of 20% per year.

Using the DCF calculator on Moneychimp and plugging in the EPS of 1.49, growth rate of 20% per year for the next 5 years and a mere 5% thereafter gives a fair value of the stock to be at 47.9. More aggressive growth rate of 25% per year for the next 5 years and 8% after that gives a fair value of 107.94. The discount rate used in both cases is 11%.

Competition and personal experience
ICICI faces competition primarily from HDFC, which is another growing bank in the private sector, as well as others like Canara bank, State Bank of India and Punjab National Bank. Out of these, only ICICI (IBN) and HDFC (HDB) trade as ADRs in US. HDFC Bank at PEG of 0.71 looks cheaper than ICICI, but has an annual dividend yield of 0.6% as opposed to 1.9% for ICICI.

Also, after having spoken to friends and family back in India, I got the impression that ICICI was more aggressive in terms of its marketing strategies as well as following-up with potential customers. When I was trying to open up an NRE savings account about a year back, I was exploring options with HDFC as well as ICICI. After having emailed both through their respective company websites, I am still waiting on hearing back from HDFC, whereas ICICI got in touch with me within 48 hours. That kind of gave me the impression that if HDFC did not care about a potential customer, it wouldn't care much after I actually became their customer - no points for guessing where I finally ended up opening an account.

Summary
All in all, I think ICICI has a very compelling growth story ahead of it as Indian economy continues to boom. The GDP growth in India has been an average 8% for the last 3 years. Although I think that the market has some more downside left to it, if I were to build a new position in ICICI, I would start buying here on dips maybe in one-thirds or one-fourths.

I started building up my position in ICICI in June '06, and just before the market tanked last week, I had a 95% profit. I plan on adding to this position sometime soon.

Disclosure: Author is long ICICI Bank

Comments

[brijsrivastava]

Interesting piece there,but do kindly check out on the likes of Bank of India and Union Bank,they too deserve a look.Good luck.

[RajDhamodharan]

Good article but other than ICCI and HDFC banks, it does not look like US investors have many other options.
Check out list of India investment options for US investor including list of ADRs and ETFs here
randv.blogspot.com/200...

and the rest of the india articles at

randv.blogspot.com/sea...

[Jose Martin]

First of all, you might have been unlucky with HDFC Bank. With respect to their internet banking, its far more smoother than ICICI Bank (try doing a trade and you will see the issues with allocations and changing accounts, to shift between IPOs,MFs and Equity!). Further, my own research finds that ICICI Bank had recently dolled out around 95,000 crore worth of housing loans for 25 yr period... what happens if a real estate crash happens? No Brainer. ICICI Bank is no doubt good, but if you talk to some of the employees you will see how disorganized they are.

[brijsrivastava]

One trend which i have noticed lately is that most foreign banks and investment intermediaries/foreign broking houses have recruited staff from ICICI bank enmasse.So,finally the culture of ICICI will be a norm with these setups.I raised this point to an ex-employee and was told that ICICI bank is more like a training centre to them.