Punjab & Sind Bank IPO - 'Subscribe' - Microsec

Punjab & Sind Bank is a major bank in Northern India. Of its almost 926 branches and offices spread throughout India, almost 402 are in Punjab state, though the bank's corporate headquarters is in New Delhi. In 1908, leading figures such as Bhai Vir Singh, Sir Sunder Singh Majitha and Sardar Tarlochan Singh founded Punjab & Sind Bank to help the weaker Face Value (INR) section of the society in their economic endeavors to raise their standard of life. In 1980 Punjab & Sind Bank was among six banks that the Government of India nationalized in the second wave of nationalizations. (The first wave had been in 1969 when the government nationalized the top 14 banks.) At some point in the 1970s Punjab & Sind Bank established a branch in London. In 1991 Bank of Baroda acquired Punjab & Sind Bank's London branch.

Objectives of the issue

Punjab & Sind Bank plans to augment its capital base to meet the future capital requirements arising out of the growth in its assets due to the growth of the Indian economy and for other general corporate purposes including meeting the expenses of the Issue. However, the company will not receive any proceeds from the Offer for Sale. A summary of P&S's objectives to utilize the funds from issue is as follows:

- Augment the Capital Base
- Meeting future Capital Requirements
- Meeting Fresh Issue Related Expenses

Key Highlights

Credit Growth: The bank's loan book has grown at a CAGR of 38.2% over the last 5 years, which is way above the industry growth rate. Even in H1FY11 the bank's advances have grown at 24% despite subdued performance by the rest of the industry. The bank's CD ratio has improved from 53.4% in FY06 to 67.5% in H1FY11. The management is confident of maintaining this above average growth rate for the next year or two.

Deposit mix has deteriorated, however more focus on CASA growth encouraging

The bank's deposits have also grown at a steady rate, 30.5%, but most of the growth has been led by termdeposits. The CASA ratio has come down over the years quite significantlyhurting thebank's NIMs . The CASA ratio has come from 52.1% in FY06 to 25% in FY10. The NIM has come down from 3.54% in FY08 to 2.67% in FY10. The bank plans to expand its presence across the country, open specialized branches for high net worth individuals and set up off-site ATMs which may boost the NIMs going forward.

Valuation & Recommendation

The last PSU Bank to listed before this issue was Central Bank of India & United Bank of India, which was issued at P/BV of 1 in FY08 and 1.07 in FY10 respectively, when the equity markets were still running strong.

Given P&S Bank's attractive discount to peers, we recommend a SUBSCRIBE to this issue. While we do not expect similar kind of listing gains for P&S Bank like Central Bank, we anticipate marginal listing gains and a longer term appreciation in the stock price as the bank improves its NIMs and return ratios. We feel that the bank is on the right track to improve its Pan India coverage and size, but we are waiting for clarity on the management's strategy and plans for the bank.

At the upper price band of Rs. 120, fresh issue is being made at book value, which stood at INR. 119.20 as of 30-09-10. Considering expected EPS of around INR 23.4 (Post Issue) for FY11, the PE multiple works out to 5.13 times, again very attractive.

Now if we give the average book value multiple (FY11 expected earnings) of its peers i.e. 1.2x to its FY'11 Adjusted book value of INR 119, the price target on the basis of relative valuation comes at INR 143 (time horizon 6 months).

In a market scenario like the current one, investors looking for quicker profits are likely to focus on outperforming PSBs, if they are willing now to bet on this sector at all. Still, on attractive valuations, thedownsides in Punjab & Sind Bank IPO is almost nil, even thoughupsides might take its own course as the dust settles down and management delivers on their promises.

Source : Equity Bulls

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