Investment Banking- Victor Sadhukhan 09bs0002671

8/9/2019 Investment Banking- Victor Sadhukhan 09bs0002671

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Analysis of Initial Public Offeringof

Submitted to: Prof. Ajay Pathak

Submitted by: Victor Sadhukhan (09BS0002671)


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INTRODUCTION

Andhra Bank in Sep, 2005

Andhra Bank is one the fastest growing PSU banks in the country with a total business size of Rs49,000 crores comprising Rs 29,871 crores in deposits and Rs 19,150 crores 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.


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POSITIVES BEFORE IPO

Andhra Banks asset quality is the best in its peer group, with net NPA ratio at 0.26% and

gross NPA ratio at 2.27% on September 05. The bank also has a well-diversified portfolio

with maximum funded exposure to the power sector (20%), followed by the textile sector

(9%).

All branches are computerized, with 88% of the business on the core banking solution

platform, which will help the bank to reduce its operating expenses in the long run and

confront stiff competition from private banks.

The credit growth is healthy at above 30%, with incremental credit deposit ratio above 100%

for the FY 2005.

Andhra bank is fully prepared to meet the Basel II requirement.

The net interest margin (NIM) had improved from 3.79% in FY 2004 to 3.95% in FY 2005.

However, with a fall in yield on earning assets, NIM end September 2005 stood at 3.62%,

considered quite healthy in the banking 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%.

Fee Income will rise because the bank is adopting measures towards increasing its high

margin fee-based income by expanding third party product offerings.

NEGATIVES BEFORE IPO

Operating expenses, as a percentage of net total income (OE/NTI), end September 2005 was

51%, which is comparatively higher than its peer group. The OE/NTI ratio is expected to

remain at the higher end with expansion plans on the horizon.

72.5% ofAndhra banks branches in Andhra Pradesh generated around 58% of the advances

end September 2005. The bank needs to have a larger share of business in other parts of the

country to maintain the growth momentum.


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ANDHRABANKOFFERDOCUMENT

The Issue is being made through the 100% book building process.

Qualified Institutional

Buyers (QIB's)

Non-Institutional

Investors

Retail investors

% of Total Size 50% 15% 35%As per guidelines bidding period should be at least 3 days and maximum 7 days and could be extended to

10 days if some changes are made.

ISSUE DETAILS

Bid/Issue opens on: January 16, 2006

Bid/Issue closes on: January 20, 2006

Price Band:Rs 82 to Rs 90

Issue Amount: Rs 85

Minimum application:75 equity shares and in multiples of 75 equity shares thereafter.

Maximum Retail Bid Amount:Rs. 1,00,000.

BOOK RUNNING LEAD MANAGERS

SBI capital markets limited

CITIGROUP GLOBAL markets India private limitedDSP MERRILL lynch limited

ENAM financial consultants private limited

KOTAK MAHINDRA Capital Company limited

REGISTRAR TO THE ISSUE

MCS limited

CO - MANAGERS TO THE ISSUE

DARASHAW & company private limited KARVY investor services limited

OBJECTIVES OF THE ISSUE

Augment the capital base to meet the future capital requirements arising out of theimplementation of the Basel II standards.

Increment of the growth in the assets, primarily the loan and investment portfolio due to thegrowth of the Indian economy.

General corporate purposes including meeting the expenses of the Issue.


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FEWRISKFACTORSBEFOREIPO

Andhra Bank has concentrations of loans to certain customers and to certain groups of

customers and credit losses from these customers or groups could adversely affect its

business and financial condition.

Andhra Banks funding is primarily through fixed term deposits, and if depositors do not

roll over deposited funds on maturity or if the bank is unable to continue to increase its

deposits, its business could be adversely affected.

Implementation of Basel II norms by RBI may increase the banks capital requirements

and may require additional investment in risk management systems.

A significant reduction in the banks credit rating could adversely affect its business,

financial condition and results of operations.

A slowdown in economic growth in India could cause its business to suffer.

A slowdown in economic growth in India could cause its business to suffer.

Andhra Bank may be required to, undertake mergers or acquisitions in the future which

may pose management and integration challenges.

Andhra Bank has a regional concentration in the state of Andhra Pradesh and is

dependent on the economy of Andhra Pradesh.

DISCLOSUEINTHE RED HERRINGPROSPECTUS

As per the requirement of SEBI guidelines and the Disclosure and Investment Protection (DIP)

guidelines, risk factors and management perception of those risk factors, the names, addresses

and the designations of the directors, the shareholding pattern of the directors, the objectives etc.

including all other guidelines are fulfilled and are mentioned in the red herring prospectus in

details.

Information about IPO Grading (Clause 2.5A, SEBI and DIP Guidelines) is not there in the

prospectus.


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FACTORS CONSIDERED AS THE BASIS OF ISSUE PRICE

1. Weighted average earnings per share (EPS)

PERIOD EPS WEIGHT

31, March 2003 8.79 1

31, March 2004 10.69 231 March, 2005 14.55 3

Weighted Average EPS for last three years is 12.30

2. Price Earnings Ratio (P/E Ratio)

a. P/E based on the above Weighted Average EPS is 6.67 at the Floor Price and 7.32at the Cap Price.

b. Based on twelve months ended March 31, 2005, EPS is 5.63 at the floor price and6.18 at the Cap Price.

3. Peer Group P/E as on March 31, 2005

PEERS P/E

Indian Overseas Bank 7.10

Allahabad Bank 6.00

Corporation bank 9.30

Bank of Maharashtra 9.50

Vijaya Bank 7.00

Industry P/E

i) Highest: 9.50

ii) Lowest: 6.00

iii) Average (composite): 7.78

4. Weighted average return on average net worth

Year RONW (%) Weights Used

31, March 2003 35.67 1

31, March 2004 30.19 2

31 March, 2005 30.80 3

Weighted average RONW for the last three years is 31.41

5. Net Asset Value per Equity Share at March 31, 2005 is Rs. 47.26.

Net Asset Value per Equity Share after Issue at March 31, 2006 is Rs. 59.67 .


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PRICINGBEFOREIPO

Before IPO launched in 16th

Jan 2006, the fair value of each share should be determined to know

that how much times the share is priced in the market for initial public offer. There are few ways

in which the price of the stock before the IPO can be found:-

P/E RATIO METHOD

PRICE ON 31ST

MARCH 2005

Peer group simple average P/E = 7.78

EPS = 14.55

Therefore, Fair Value = 14.557.78=113.2

Its quite evident that the issue was underpriced making the issue more attractive to the investors.

PRICE ON 30TH

SEP 2005

Andhra Bank was already listed on the National Stock Exchange of India Limited, Bombay

Stock Exchange Limited and the Hyderabad Stock Exchange Limited. So its P/E given below is

based on the closing market price of its Equity Shares on NSE as at September 30, 2005.

P/E = 7.20

On 30th

September, 2005 the closing market price on NSE was Rs.103 per share.

So from here it can be said that the EPS was 103 7.20 = 14.30

It can also be said that the issue was underpriced which makes the issue more attractive to the

investors.

BOOK VALUE METHOD as on SEP 2005

HEADS AMOUNT Rs.(MILLIONS)

Share Capital 4,000.00

Total Reserves & Surplus 16,550.55

Deferred Tax Assets 86.80

Net Worth 20,463.75

No. of shares (in millions) 400.00


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Net Worth = 20,463.75

No. of shares = 400 million

Book Value 20,463.75400 = Rs 51.16

No. of times it is overpriced 85 51.16 = 1.66 times

From the book value method of price calculation its clear that the issue was overpriced by 1.66

times. But earlier it was found that the issue was underpriced.

PRICEAND OTHERCHANGESAFTERIPO

After the IPO the price of the stock was

YEAR (31ST

MARCH)

2006 2007 2008 2009 2010

Price (Rs)/share 80.75 75.7 74.7 45.95 108.2

Return on the stock and NSE showing the underpricing and overpricing

Return from stock = ( - 1) 100

Return from market = ( - 1) 100

YEAR 2006

31st

March

2006

15th

November

2007

31st

March

2008

03rd

January

2008

31st

March

2009

31st

March

2010

31st

March

Return from

stock (%)-A

-5 11.41 -10.94 45.35 -9.59 -45.94 27.29

Return from

market(%)-B

20.09 36.82 28.26 118.08 67.11 6.63 85.27

A-B

marketadjusted return

-25.09 -25.41 -39.2 -72.73 -76.7 -52.57 -57.98

The market adjusted returns are shown in the above table. To check whether the stock has been

priced at its intrinsic worth or not, returns are computed. If these returns are positive, the

indicator is underpricing. Similarly if the returns on the stock are negative then it is an indication


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of overpricing. From the above table it can be seen that the returns on the stock are sometimes

negative and sometimes positive.

The above Graph shows the fluctuation in the stock return and the market return for fewparticular periods. It can be seen that there is a huge positive correlation between the return of

the stock and the return of the market.

Deposits and borrowings (figs: crores)

YEAR (31ST

MARCH)

2005 2006 2007 2008 2009

BORROWINGS 983.24 758.49 733.53 590.51 1311.12

DEPOSITS 27550.71 33922.41 41454.02 49436.54 59390.02

After the IPO of Andhra Bank the borrowings of the Bank which normally costs a bank morewere continuously decreasing till 2008, which indicates that the bank was becoming financially

healthy in the sense that it was able to pay back its borrowings. But in 2009 there was huge

increase in the borrowings because the bank went for private placement of unsecured redeemable

non Convertible (upper tier ii) bonds in the nature of promissory notes of Rs.10 Lakhs each for

cash at par aggregating to Rs. 200.00 crores.

Whereas the deposits of the bank were continuously increasing showing that the Bank was able

to increase its CASA and other deposits which generally cost less to a bank. Thus Andhra Bank

was slowly and steadily becoming financially healthy inspite of the Global recession.

Book value

YEAR (31ST

MARCH) 2006 2007 2008 2009 2010

Book value per share (Rs.) 59.67 65.08 67.00 75.20 90.93

Again from the above book value table it can be said that within the next 4 years the stock

attained the book value which is equal to the issue price showing a sign that the issue was a good

option for long term investors.

-60

-40

-20

0

20

40

60

80100

120

140

31st March 15th

November

31st March 03rd

January

31st March 31st March 31st March

2006 2006 2007 2008 2008 2009 2010

Return

from

stock

(%)-A

Return

from

market(

%)-B


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RONW(RETURN ON NET WORTH)

Before the IPO, ANDHRA BANK in 2005, 31 st March was having a RONW of 30.80%

1. Profit after Tax=5,821.94

2. Net Worth=18,904.16

RONW=12=30.80

YEAR 2001 2002 2003 2004 2005 2006 (after issue) 2007 2008 2009

Return

on Net

worth

(%)

15.45 23.12 35.67 30.19 30.80 5609.688428939.411

=19.38

17.78 17.97 18.94

Andhra bank after the issue had a return on net worth which is lower than the last year. After the

issue the net worth of the company drastically increased because of the increase in the share

capital but there was no effort been taken on part of Andhra bank to increase the PAT so that the

RONW remains the same. As a result the RONW came down. But later on again from 2007 the

RONW started increasing.

THE STATUSOF THE OBJECTIVEAFTERTHE ISSUE:-

RBI was adopting a phased approach to the implementation of the Basel II norms beforethe issue, so in order to adhere or to maintain consistency and harmony with international

standard banks have been advised to adopt the Standardized Approach for credit risk and theBasic Indicator Approach for operational risk. That was why the issue was made.

BASEL - II

Basel II is the second of the Basel Accords, which are recommendations on banking laws and

regulations issued by the Basel Committee on Banking Supervision. The Basel new accord is

more expensive and complex than the 1988 accord. The new accord is more risk sensitive

and it contains a range of new options for measuring both credit and operational risk. The

adoption of the new capital adequacy framework relating to assigning capital on

consolidated basis, use of external credit assessments as a means for assigning preferential

risk weights, sophisticated means for estimating economic capital etc, may need suitable

modification to adequately reflect the institutional realities and macroeconomic factorsspecific to emerging market economics including India. This is an international standard that

banking regulators can use when creating regulations about how much capital banks need to put

aside to guard against the types of financial and operational risks banks face. Advocates of Basel

II believe that such an international standard can help protect the international financial system

from the types of problems that might arise should a major bank or a series of banks collapse. In


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practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management

requirements designed to ensure that a bank holds capital reserves appropriate to the risk the

bank exposes itself to through its lending and investment practices.

Capital Adequacy Ratio or CAR or CRAR :

Basel II norms strictly came up with the rule that banks will have to keep a minimum CAR of8%.

Capital adequacy ratio is the ratio which determines the capacity of the bank in terms of meeting

the time liabilities and other risk such as credit risk, operational risk, etc. In the simplest

formulation, a bank's capital is the "cushion" for potential losses, which protects the bank from

depositors or other lenders.

Banking regulators in most countries define and monitor CAR to protect depositors, thereby

maintaining confidence in the banking system. CAR is similar to leverage; in the most basic

formulation, it is comparable to the inverse of debt-to-equity leverage formulations. Unlike

traditional leverage, however, CAR recognizes that assets can have different levels of risk.

Capital Adequacy Ratio

Andhra

Bank

(Year)

2004-05 2005-06 2006-07 Basel-I

2007-08

Basel-I

2008-09

Basel-II

2007-08

Basel-II

2008-09

Capital

Adequacy

Ratio

12.1 14.0 11.3 11.6 12.4 11.61 13.2

From the above its clear that Andhra bank has been able to fulfill the objective by adhering withthe international BASEL norms after the IPO.

CONCLUSION

The low valuation of Andhra Banks stock and few comparative advantages than its peers has

helped the stock safeguard itself from credit and interest rate risk.

Because of higher concentration in Andhra Pradesh, Andhra Bank came up with new 219

branches in other parts of India to cater its service allover India after the issue.

The number of business delivery channel was also increased by 484 after the issue. By offering

value added services like Internet Banking, Corporate CBS, Mobile Banking, instant issue of non

personalized debit cards and transaction PIN, online trading facilities, the bank has improved itsclient base substantially. The bank has recorded a health rise in PAT from 575.41 crores to

652.81 crores an increase of 13.45% in the FY ended 31 March 2009. Book value of the bank

increased to Rs. 75.20 in the FY ended 31 March 2009 from Rs. 67.00 in the FY ended 31

March. The CRAR stood at 14.75% as per BASEL II Guidelines. The net NPA ratio of Andhra

Bank was a low 0.17 per cent as of end-2009.

The customer base of the bank has also increased from 13.9 million in September 30, 2005 to 20

million in June 2009.


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Few key Performance Ratios before and after the IPO

YEAR-31st

march

2005 (before) 2006 (after) 2007 2008 recession 2009 recession

Net NPA to Net

Advances0.28 0.24 0.17 0. 15 0.18

Growth in TotalAssets 21.18 24.26 16.90 19.04 20.99

Productivity in

lakhs286.92 362.25 440.07 540.23 625.78

Net Interest

Margin3.58 3.32 3.20 2.86 3.03

Return On

Assets1.59 1.38 1.31 1.16 1.09

Few key Performance Ratios after the IPO

YEAR-31st march 2006 2007 2008 2009 2010

Earning retention ratio 60.10 60.43 60.55 60.89 72.95

Reported EPS (Rs) 10.01 11.09 11.87 13.46 21.56Net operating income per

share (Rs)59.50 71.21 94.18 116.79 144.83

Dividend payout ratio

(net profit)39.86 39.55 39.43 39.09 27.03

From the above tables it can be concluded that the Bank has always been conservative. Other

than the P/E method, in the book value method of price calculation it was found that the issue

was overpriced. Again from the returns on the stock at different periods of time, the stock

sometimes seemed underpriced and sometimes overpriced. Any rational investor after knowing

that the stock is overpriced would never invest in such a stock. But on the flip side, every

company issues the share at a price higher than what it should have been. Again in case of thisbank the market price of the sock on the issue date was more than the issue price. So this fact

should also be taken into consideration by the investors before going for this IPO. Both the price

and return from the stock has been fluctuating after the issue.

But the performance of the bank was not affected by the global recession and the main objective

of the issue was fulfilled. Recently after the market recovery the banks performance has been

good, both in terms of price and return. Both are increasing at a good pace.


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REFERENCES:

RED HERRING PROSPECTUS of Andhra Bank IPO.

All the Annual reports of Andhra Bank from 2003-2010.

http://www.nseindia.comhttp://rbidocs.rbi.org.in/rdocs/Publications/PDFs/ATIV311009.pdf

http://www.moneycontrol.com/stocks/company

http://www.andhrabank.in

http://www.indbankonline.com
http://www.nseindia.com/http://www.nseindia.com/http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/ATIV311009.pdfhttp://rbidocs.rbi.org.in/rdocs/Publications/PDFs/ATIV311009.pdfhttp://www.moneycontrol.com/stocks/companyhttp://www.moneycontrol.com/stocks/companyhttp://www.andhrabank.in/http://www.andhrabank.in/http://www.indbankonline.com/http://www.indbankonline.com/http://www.indbankonline.com/http://www.andhrabank.in/http://www.moneycontrol.com/stocks/companyhttp://rbidocs.rbi.org.in/rdocs/Publications/PDFs/ATIV311009.pdfhttp://www.nseindia.com/

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Investment Banking- Victor Sadhukhan 09bs0002671