Punjab and Sind Bank IPO Note - Motilal Oswal

Punjab and Sind Bank: IPO Note; Priced at 0.8x FY12E BV; RoE estimated at 17-18%

Punjab and Sind Bank (PSB), a PSU bank wholly owned by government of India (pre-IPO), is coming up with its IPO of 40m shares (face value of Rs10). Post issue, the GOI shareholding will decline to 8 (highest among listed PSU banks). Price band for the issue is Rs113-120. In addition, retail investors will get a 5% discount.

PSB is a regional PSU bank with over 68% of its branch presence in North India, contributing ~55% of the deposits and ~62% of loans. As of Sept 2010, the bank's has 926 branches and 63 ATMs. ~45% of the branches are in Punjab. Bank has just 21 branches under CBS platform covering 30% of the total business. Bank targets to cover 500 branches under CBS by November 2012.

PSB registered loan CAGR of 38%, Deposits CAGR of 31% and Asset CAGR of 32% over FY06-10 with. Bank has less than 1% market share in overall business in India. As on 1HFY11, 26% of deposits, 25% of loans and 24% exposure is towards top 20 accounts.

Risk factors: (1) Technology (just 21 branches and 30% of business on CBS platform) (2) HR issues: High retirements at the general managers level over next 6-8 quarters, CMD appointment yet awaited from GoI (3) Higher proportion of bulk deposits and low CASA ratio in a rising interest rate scenario (4) No provision made for 2nd Pension liability and (5) NPAs post strong growth in past few years

At the upper end of the price band PSB will trade at 0.8x FY12 BV as compared to peers at 0.9-1.1x P/BV of FY12E (with stronger return ratios). While the issue is attractively priced, key challenges such as lack of clarity on appointment of new CMD, technology up-gradation (execution risk), margin sustainability (comparatively weak liability franchise), and increase in opex cost (no clarity on pension and gratuity) would be key drivers for the stock performance in our view.

Source : Equity Bulls

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