Ici Bank: A Growth Stock

ICI Bank: A Growth Stock for the Future

There are many unknown factors in the U.S. economy that will determine the success of any stock. The year 2007 is over 1/4 of the way complete and it is too early to see forecasts for 2008. We cannot determine the growth rate of the U.S. economy. Trends up to this point are no indication of future trends. We do not know the direction of U.S. interest rates. There are hints that the Fed's will cut interest rates from 5.25% to 5% sometime in May of 2007 (Jubak, 2006). Inflation levels are another unknown that will affect stock decision. Thus far, oil prices have continued to climb and it is likely that oil prices will continue to climb as the year progresses (Jubak, 2007). These internal factors will have a significant impact on stock decisions and growth for the remainder of 2007.

Several external factors also will affect which sectors grow, and which ones play dead in the U.S. economy. Economists outside of the U.S. are forecasting higher growth than those inside the U.S. European economists expect real growth at around 2.4% in 2007, while forecasters in the U.S. expect it to hit only 2% or less (Jubak, 2006). Expectations are that the U.S. dollar will remain weak and will slide even lower than it is now, making it less attractive to foreign investors (Jubak, 2006). It appears that the U.S. economy is gaining strength, but one must exercise caution with rising oil prices and higher interest rates on the horizon.

According to Charles Schwab, the top sectors for 2007 are Financial, Information and Technology, and Health Care. These sectors are expected to comprise nearly 56% of the total economy for 2007 (Sorenson, 2007).

Source: Sorenson, (2007)

Cautious economists suggest that the bull market is coming to an end and that we have to turn our strategies to bear market strategies (Sorenson, 2007). This will mean the need to change strategies for many of us. The challenge for 2007 is how to obtain growth in a turbulent and unpredictable economy. The answer lies in investment in top growth sectors. The best sector for 2007 is the financial sector and this is the sector in which to invest for growth in 2007.

ICICI Bank and the Future

The largest growth sector for 2007 is the financial sector. With a sagging U.S. economy and a potential turn towards a bear market in the U.S., many investors are looking outside of the U.S. For growth opportunities. Emerging markets, such as India provide will provide exciting opportunities for growth investors in the future. The key to capturing India's potential for growth is in the ability to extend services to capture rural areas (Das, 2006). One of the key problems in the past was infrastructure development. ICICI bank chose to target an underserved niche in the Indian economy. This niche is the key to growth for ICICI bank. The key to growth in any industry is to go where no one has gone before. This is exactly what ICICI bank intends to do in the next several years.

The world of microfinance is hotly debated topic among those in the banking industry. ICIC bank is planning a major expansion of its rural lending. This expansion is expected to increase their customer base eightfold in the next five years (Das, 2006). It intends to serve a sector of the market that has been essentially ignored by others in the industry. It will serve the 58-78% of rural households that do not have any access at all to basic banking services (Das, 2006). Collectively, microlending will represents a part of the banking business that will rival big business in India (Das, 2006). This is exactly the type of innovation that one looks for when they are choosing a growth stock.

ICICI Bank Financials

ICICI Bank's most recent financial statements include the period from March 31, 2006 through March 31, 2007. All financials were obtained from Nasdaq.com. All amounts in the following analysis are converted to U.S. dollar equivalents. ICICI bank. Many key indicators for the bank increased during the year. For instance, operating profit increased from $894 million to $1,351 million. Profit after tax increased by almost 22%. Net interest income increased by 41%. Income from bank fees increased 45% (Nasdaq.com, 2007). In addition, after tax profits increased from $182 million to $190 million. Deposits increased by 40% (Nasdaw.com). Net customer assets demonstrated an increase of 35% (Nasdaq.com). Retail assets comprised 65% of the banks total assets for the past year, according to NASDAQ.

These numbers are impressive and there are many who would question if they are sustainable for the future. However, the real question is whether these numbers are a reflection of their core strategy or whether there is some other factor involved, such as general economic conditions. As one will recall, the key strategy of ICICI Bank is to capture an untapped portion of the rural market. They are focusing on feed-based products and services, as well as on opportunities presented by expansion of Indian companies in the global marketplace (Nasdaq.com, 2007). If one only considers the sales from the bank's rural portfolio, it will provide a better picture of the success of their rural expansion projects. From March of 2006 to March of 2007, ICICI Bank increased its rural portfolio by 37% (Nasdaq.com). This increase closely matches overall growth percentages as well.

The Reserve Bank of India has approved the merger of Sangli Bank with ICICI Bank holdings. This will increase the ICICI Bank network to 950 branches (Nasdaq.com, 2007), making it one of the largest banks in India with the farthest reach and customer base, as far as geographic territory is concerned. In addition to the assets obtained through this merger, ICICI Bank has also added 141 branches in its own network and 1,071 ATMs (Nasdaq.com, 2007). These expansions are capital intensive and raise a question of whether ICICI Bank is growing too fast too soon. However, their key financial statements indicate that the revenue realized from these expansions is already beginning to pay off.

Downside Risk

Financial statements for the past year differ from those in previous years due to these expansions. While capital expenditures increased significantly, so did consolidated profit after taxes. Consolidated profit increased by 14% (Nasdaq.com, 2007). This included a reported loss by ICICI Prudential Life Insurance Company (Nasdaq.com, 2007). ICICI Bank attributes this loss the fact that the Life Insurance portion of their business is a new addition. It does not have a clientele built up yet. It is typically for life insurance companies to show a loss for the first few years of their existence. Life insurance is a risky business and this move represents one of the key downside risks to the future of ICICI bank. If one excludes this loss, the consolidated profits would be even higher.

ICICI Lombard General Insurance Company is an established insurance company under the ICICI umbrella. It is an established insurance company that served the public sector. They increased their marketshare to approximately 35% of the total general insurance marketshare (Nasdaq.com, 2007). This portion of the business is an indication that ICICI Bank has experience in the insurance business and that it can mitigate the risks associated with the insurance business in a manner that demonstrates growth. This is an excellent resume in favor of ICICI's ability to manage the risks associated with its new insurance endeavor. ICICI has substantial capital set aside to help offset any underwriting losses.

The insurance business is one of the most risky endeavors in the banking industry. A widespread natural disaster can have a significant impact on the solvency of the insurance portion of the business. However, ICICI has proven leadership ability in this sector of the business. They have substantial reserves set aside to manage these risks and experience managing them. The insurance business is only a small portion of ICICI's total portfolio. Therefore, the risks are limited for these operations. The insurance business makes the package offered to rural customers complete, giving them a one-stop solution to their banking needs. The downside risk associated with the insurance portion of their business is limited due to the small portion of total assets that it represents.

Dividends

Although the focus of the current stock purchase is on growth, ICICI has recently announced an added bonus to stock purchase. On April 20, 2007, ICICI Bank announced that it will pay a dividend of approximately 10. Rupies per share, as compared to 8.50 rupies per share in the previous year (Nasdaq.com, 2007). This income is an extra bonus to the growth potential of the stock in future years. Although dividends are not the most important factor in the purchase of a growth stock, they still add a bit of extra incentive to an already healthy growth potential. When a company adds or increases dividends, it makes the stock more attractive to investors, which can lead to a significant stock price increase in the future.

Financial Statements

One of the most significant factors in the decision to invest in ICICI Bank is to determine the affects of recent capital expenditure and the anticipated return for these investments. Entry into microfinancing represents a considerable amount to risk, due to the financial instability of the target market. The following chart highlights the most significant changes affecting the financial health of ICICI bank that result from expenditures associated with entry into the rural finance venture. It compares key indicators and explains the effects of ICICI's most recent changes to their banking strategy.

Income Statement for years 2003-2006 (in millions USD)

Total Revenue

Cost of Revenue

Gross Profit

Balance Sheet for years 2003-2006 (in millions USD)

Current Assets

Total Liabilities

Total Equity

Cash Flow for years 2003-2006 (in millions USD)

Net Income

Net Cash Flows Investing

Net Cash Flows Financing

Net Cash Flow

Data Source: Nasdaq.com (2007).

The income statement demonstrates the results of capital expenditures due to expansion over the past three years. In 2006, revenues increased, costs decreased, and thus gross profits increased as a result. This is demonstrated by the increase in assets for the years 2004/2005 that corresponds to an increase in costs for the same years. The Cash flow statement demonstrates the direct influence of these expenditures.

The significant rise in total liabilities for 2006 is a reflection of a combination of continued expansion efforts and the merger with Sangh Bank. As one can see, ICICI Bank was able to reduce a significant amount of there debt in 2006. They realized almost immediate increases in income as a result of their expansions. Profit margins increased steadily from -7% in 2003 to 9% in 2006 (Nasdaq.com, 2007). Operating margins demonstrated a similar pattern to cash flows and investment expenditures. However, this resulted in a net increase from 42% in 2003 to 51% in 2006. http://www.nasdaq.com/images/spacer.gif

Stock Valuation

Two essential elements must be present for a stock to be considered a growth stock. It must demonstrate growth in both sales and earnings. However, in the financial sector, one must be careful to choose a stock that demonstrates a stable growth pattern, for instance, short-term growth can be realized from a one-time event, such as sale of a major asset or a tax credit (Domash, 2007). One must be careful that the growth is due to steady increases in business, not a one-time event that could skew the results.

Many analysts focus on earnings per share as the key to stock valuation. ICIC Bank currently has an earnings per share of $1.38 USD (Nasdaq.com, 2007). This is healthy, but one must look at what is behind the EPS in order to determine real shareholder value. Our financial statement analysis demonstrated the effects of expenditures on the overall performance of the company. In 2006, the results of ICICI's efforts began to pay off and they were able to demonstrate real growth from their expenditures in previous years. This adds credibility to the EPS estimates for this company.

The return on equity is an important consideration as it can provide an excellent picture of the limits on a growth earnings. A company cannot grow earnings faster than its ROE without raising additional capital. If the ROE is too small then it will be impossible for the company to sustain growth without borrowing additional money. ICICI has already invested a considerable amount of capital into new projects. This would worry some analysts. However, the following chart demonstrates that ICICI Bank still has some room to grow.

As ICICI begins to realize increased revenues as a result of the expansion of its rural business, the ROE will increase. However, this also comes with a word of caution. ICICI Bank might have to curb its growth until some of its recent acquisitions and expenditures become profitable. ICICI is doing well, but this could end if they carelessly continue to expand too fast. This is a downside risk, but ICICI realizes this risk and will take steps to manage growth at a sustainable rate.

The final consideration in a growth stock is to take a long-term look at the stock price chart. One would not consider a stock to be of the growth category if there are significant downtrends for extended periods of time. ICICI bank currently has a bets of 1.17, which means that it is considerably more volatile than the U.S. markets. However, this can be expected in an emerging market, particularly when the company is breaking into a market where few have tread before them. ICICI Bank stock demonstrates a strong consistent uptrend over the past five years.