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Tuesday, March 06, 2007

Sharekhan Investor's Eye dated March 05, 2007


ICI India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs550
Current market price: Rs435

ICI sells Quest International

Key points

  • ICI India (ICI) on March 02, 2007 sold its 100% equity share holding in Quest International India to Givaudari (India) Pvt Ltd for Rs320 crore. The company had also received an interim dividend of about Rs31 crore prior to the sale of Quest International India. Further, it expects an additional consideration of about Rs35 crore for various agreed adjustments in the next quarter.
  • At the current market price of Rs435, the stock trades at 14.7x its FY2008E earnings per share (EPS) of Rs29.7. We maintain our Buy recommendation on the stock with a price target of Rs550.

ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,240
Current market price: Rs820

New holding structure to unlock value

Key points

  • Key investments in insurance and asset management businesses to be transferred: ICICI Bank has decided to transfer its 74% stake in the insurance and 51% stake in the asset management businesses to a separate wholly owned subsidiary company called ICICI Holdings. It plans to further list ICICI Holdings separately in CY2007. The independent listing should unlock significant value for its life insurance business and provide further visibility to its stock's valuation. The bank plans to transfer the investments at the current book value, which stands at Rs1,950 crore.
  • Listing will provide insurance companies greater access to capital: The insurance business needs a huge amount of capital infusion and ICICI Bank could not have met the capital demands without having to go for another equity issue. The transfer of stakes to a holding company was done with the idea of providing insurance companies greater access to capital.
  • Significant value to be unlocked in the insurance business: Currently there are no listed insurance companies in the Indian market and the valuation provided to certain stocks like ICICI Bank and Bajaj Auto based on the new business adjusted profit (NBAP) multiple varies across the analyst community. The analyst community has taken a cue from comparable valuations given to the Chinese insurers which in the past year had been re-rated to 30-40x NBAP multiples. The listing of the holding company will provide a valuation benchmark for these high-growth businesses of the bank and unlock significant value for the insurance businesses. We have valued the life insurance business at 21x FY2009E NBAP, which we feel is a fair multiple for such a high-growth business.

SECTOR UPDATE

Cement

ACC reports negative dispatch growth
The cement majors have recorded a dispatch growth of 3% year on year (yoy) to 5.62 million tonne in the month of February. Amongst the cement majors, Gujarat Ambuja continued to register a buoyant growth and grew by 9.7% yoy to 1.36 million tonne. The AV Birla group reported a growth of 6.8% yoy to 2.84 million tonne whereas ACC reported a negative growth of 7.2% yoy to 1.42 million tonne.

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