Investment Note

Description

• Punjab & Sind Bank has a good network – 926 branches in North/ Central India
• The IPO pricing of Rs 113-120 per share will help firm raise Rs 452-480 crores
• The primary purpose is to fund growth plans and shore up capital adequacy
• Government shareholding will fall to 82% post IPO

Positives

• 5% Retail discount; Attractively priced compared to PSU peers, with P/E multiple of 4.56-4.84, and P/B value of 1.12
• CAGR of 38% in business over 06-10 with advances + deposits at Rs. 88k crores
• Gross NPA ratio is falling, and is currently at 0.92%, favorable compared to peers; Conservative in NPA provisioning
• Also there has been a 24% CAGR in earnings
• Over 8000 employees, but still it has high productivity of Rs 9.6 crore/ employee
• Quality partners – Tie-ups with Aviva (for life), Bajaj Allianz (general insurance) and UTI MF (distribution of MF product) should shore up its fee-based income.

Negatives/ Challenges

• Low CASA at 25%, resulting in lower Net interest margins (NIM) at 2.67 for FY-10. Hence now firm is focused on branch and deposits growth.
• Lack of clarity on appointment of new CMD – typical problem of PSU firms
• Slow technology up-gradation
• Presence in limited geographies – however in these areas, there is a high consumer recall/ brand strength

Outlook, IPO status and Investment Advice

• While not large, P&S Bank is likely to grow faster and more profitably than the sector for a few years. Thereafter who knows, a M&A maybe?
• On Day 1, 13^th Dec, the issue has been oversubscribed 1.58 times – surprising strength, with QIB (2.94 times), HNI (0.18 times) and Retail (0.40 times).
• Looks like even the recent steep fall in Indices has not dampened the appetite for attractively priced government offerings :-)
• Watch subscription figures of IPO till 15^th Dec to set expectations for allotments
• For firm allotment in Retail, invest in 1650 shares at cut off (120) – a total investment of 1,98,000.

Also see post closure note of this IPO – click link