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Present
Equity Capital comprises 400,000,000 Equity shares of Rs.10/-
each fully paid up
Issue
size of 85,000,000 Equity Shares at a face value of Rs 10 each
through the 100 per cent book-building route
BACKGROUND
Andhra
Bank is one the fastest growing PSU banks in the country with
a total business size of Rs 49,000 crore comprising Rs 29,871
crore in deposits and Rs 19,150 crore in advances till
September, 2005. It presently operates a network of 1,173
branches, 142 extension counters, 354 ATMs and 38 satellite
branches spread over 21 states and 2 Union Territories as of
end-June ’05. It also has ATM-sharing arrangements with
leading banks such as SBI, HDFC Bank, IDBI Bank, Indian Bank
& UTI Bank, thereby extending its reach to over 9,000 ATMs
spread across the country. The bank handles a major portion of
the business of the state government of Andhra Pradesh and
government of India holds around
62.5 per cent stake in it.
OBJECTS OF
THE ISSUE
The
objects of the issue are to augment its capital base to meet
the future capital requirements arising out of the
implementation of the Basel II standards and the growth in
assets, primarily loan and investment portfolio due to the
growth of the Indian economy and for other general corporate
purposes including meeting the expenses of the Issue.
Key
Investment Rationale
Buoyant Sector
Indian
economy has grown at a sustained pace over the last few years
with GDP growing at 6.9% in financial year 2005 and 8.5% in
financial year 2004. A key beneficiary of this economic boom
was the banking sector, which posted credit growth of more
than 30%. The banks have been able to post higher jump in
profitability due to sustained credit growth, which continues
to be fuelled by retail and SME financing. The incremental
credit deposit ratio has climbed above 80% along with jump in
deposit mobilization. This credit boom also aided the banks to
improve their asset quality and reduced their dependence on
treasury incomes. We expect the current growth momentum to
continue with banks likely to further grow in size &
profitability in years to come.
Impressive growth
Andhra
Bank has achieved significant growth in net advances at a CAGR
of around 24% over the past 4 years and it advances grew by
31.94% to Rs. 187,66.29 crore as of September 30, 2005 from
Rs142,22.56 crore as of September 30, 2004. It has well
diversified credit portfolio with corporate segment
constituting 65%, Housing & Retail 21% and agriculture
14.35%.
Retail Thrust
The
bank plans thrust on retail banking segments through launch of
new products and intends to launch internet banking from March
2006. It is likely to launch retail products such as liberal
loan terms in housing, personal and education loans along with
in-built insurance coverage. This new measures would help it
to achieve over 25-30 per cent growth in retail deposit and
advances going forward. It is also looking at expanding into
new geographies such as eastern region, to drive business
growth.
Fee Income to rise
The
bank is adopting measures towards increasing its high margin
fee-based income by expanding third party product offerings.
It has recently entered into agreements with Principal Mutual
Fund, SBI Mutual Fund, TATA Mutual Fund, UTI Mutual Fund and
Sundaram Mutual Fund for the distribution of mutual fund
products issued by these providers. In addition, it also plans
to market and sell life insurance products of Life Insurance
Corporation of India and United
India Insurance along with its savings and term deposit
products. We have also recently relaunched Western Union Money
Transfer services, increasing the number of locations from 252
to 700 as at March 31,
2005.
High asset quality
The
bank enjoys superior asset quality among PSU banks with asset
recoveries & provisioning likely to keep its net NPAs
close to zero. The ratio of net NPAs to net advances declined
to 0.28% as at March 31,
2005 from 0.93%
as at March 31,
2004. The ratio
of net NPAs to net advances as on September 30,
2005 was 0.26%.
Key
investment concerns
High
Treasury Income: The
bank continues to derive a large part of its income from
treasury operations which contributed 35.88 to its total
income during the six month ended September 30,
2005. The bank
faces risk of decline in treasury income in the event of
firming up of interest rates and would face problems in
replicating the bond gains going forward.
NIM
to decline: The
bank’s high net interest margins of 4.21 per cent during the
September half 2004 declined to 3.62% in the first half of the
current fiscal. These high NIMs are still unsustainable and
are expected to decline further as the cost of deposits are
going up further.
Financials
Andhra
Bank posted marginal growth of 5.6 per cent in net interest
income to Rs 288.6 crore (Rs 273.3 crore) for the quarter
ended September 2005. Treasury profits plunged from Rs.169
crore earlier to Rs.29 crore. However lower provisions on
investments and NPA resulted in net profit jumping 21.54%, to
Rs.132.89 crore as compared to Rs 109.33 crore.Net NPAs rose
marginally from 0.2% a year earlier to 0.26% as the bank
didn’t made any NPA provisions in the first half of the
current fiscal.
Valuations
Andhra
Bank is among one the best mid-sized PSU bank with high return
on equity & quality assets. It has implemented
core-banking solutions in 830 of its 1,177 branches. Although
there would be a pressure on margins due to depleting treasury
gains, we expect the bank to make up for it through aggressive
retail growth and rising contribution from fee income. We
expected the stock to continue to command rich valuations of
1.68x FY06E price/book value.
The issue appears
attractive as it discounts its FY06E Book Value 1.41x at the
lower price brand of Rs 82 and 1.54x at the upper price band
of Rs 90. The
investors may subscribe from a long-term investment
perspective as well as deriving benefits of listing gains.
(For
Risk factors and other details please refer Red Herring Prospectus)
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