ICICI Bank, a large private sector bank in India, shows mixed financial indicators. While it has delivered strong profit growth and has a high EPS, the high debt to equity ratio of 6.53 and the stock trading at 3.52 times its book value are concerning. The promoter holding remains constant at 0%. Operating margins are healthy at 36%, but the company has a low interest coverage ratio and significant contingent liabilities. Given these factors, the stock warrants a cautious approach from investors, who should carefully assess the risk-reward profile before making an investment decision.
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TLDR of the article:
Company: ICICI Bank Ltd Latest Stock Price: ₹1070 Intrinsic Value of Stock: ₹1015.63
Key Financial Data:
- OPM (Operating Profit Margin): 36.0%
- Debt to Equity Ratio: 6.53
- Promoter Holding: 0.00% (constant)
- Pledged Percentage: 0.00%
- EPS (Earnings Per Share): High (₹60.63 TTM)
- Stock P/E (Price to Earnings Ratio): 17.7
- Book Value: ₹307
- Dividend Yield: 0.74%
- ROCE (Return on Capital Employed): 6.32%
- ROE (Return on Equity): 17.2%
Pros:
- Company is expected to give good quarter results
- Delivered good profit growth of 34.6% CAGR over last 5 years
Cons:
- Stock trading at 3.52 times its book value
- Low interest coverage ratio
- High contingent liabilities (Rs.51,22,409 Cr)
- Possibility of interest cost capitalization
- Significant other income (Rs.72,528 Cr) included in earnings
Company Introduction, Profile
ICICI Bank, one of India’s largest private sector banks, offers a wide range of financial products and services to retail, SME, and corporate customers. With a network of 5,300 branches and 15,200 ATMs across the country, the bank has a strong presence, especially in metro cities. As of the latest financial data, ICICI Bank boasts a market capitalization of ₹7,51,390 crores and a current stock price of ₹1,070. The bank has demonstrated impressive growth over the past five years, with a sales growth of 14.3% and a profit growth of 34.6% CAGR. However, the stock’s valuation remains high, with a price-to-earnings ratio of 17.7 and a price-to-book value of 3.52. The bank’s operating profit margin stands at a healthy 36%, while its return on equity is 17.2%.
Should We Buy, Sell or Hold This Stock and Why?
Investors should approach ICICI Bank’s stock with caution. While the bank has delivered strong profit growth and has a high EPS of ₹60.63 (TTM), there are some concerning factors to consider. The debt-to-equity ratio is high at 6.53, and the stock is trading significantly above its book value. The promoter holding remains constant at 0%, which may not instill confidence in some investors. Additionally, the bank has a low interest coverage ratio and substantial contingent liabilities of ₹51,22,409 crores. On the positive side, the company is expected to deliver good quarterly results and has maintained a consistent operating profit margin. However, given the high valuation and potential risks, investors should carefully assess their risk appetite and investment horizon before making a decision. A cautious approach is recommended, with a thorough analysis of the bank’s financial health and growth prospects.
Vital Company Ratios:
For a layman to understand ICICI Bank’s financial health, some key ratios to consider are:
- Earnings Per Share (EPS): ₹60.63 (TTM) – a high EPS indicates strong profitability.
- Price-to-Earnings (P/E) Ratio: 17.7 – the stock is trading at a premium compared to its earnings.
- Return on Equity (ROE): 17.2% – a higher ROE suggests efficient use of shareholders’ funds.
- Debt-to-Equity Ratio: 6.53 – a high ratio indicates significant leverage and potential financial risk.
- Operating Profit Margin (OPM): 36% – a healthy OPM shows the bank’s operational efficiency.
- Dividend Yield: 0.74% – a moderate dividend yield for income-seeking investors.
While these ratios provide insights into the bank’s performance, it’s essential to compare them with industry benchmarks and track their trends over time. Investors should also consider other factors, such as the bank’s growth prospects, asset quality, and management stability, before making an informed decision.
Key Data Points:
- Promoter Holding: 0.00% (constant)
- FII Holding: 46.00% (as of Dec 2023)
- DII Holding: 43.65% (as of Dec 2023)
- Sales Trend: Increasing (₹40,865 Cr in Dec 2023)
- Profit Trend: Increasing (₹11,515 Cr in Dec 2023)
- Debt Trend: Increasing (₹13,99,894 Cr in Mar 2023)
- Margin Trend: Fluctuating (OPM 36% in Mar 2023)
- Company PE: 17.7
- Industry PE: 12.7
- Gap between Intrinsic Stock Value and Current Market Price: ₹54.37 (Intrinsic Value: ₹1015.63, Current Price: ₹1070)
- Market Cap: ₹7,51,390 Cr
- Cash in Hand: Data not available
- Dividend Payout: 16% (Mar 2023)
Competing Companies and Performance
ICICI Bank’s main competitors in the private sector banking industry include HDFC Bank, Kotak Mahindra Bank, Axis Bank, and IndusInd Bank. Among these, HDFC Bank has the highest market capitalization at ₹11,76,267.69 crores, followed by ICICI Bank at ₹7,51,389.88 crores. In terms of P/E ratio, ICICI Bank (17.70) is slightly higher than HDFC Bank (17.29) but lower than Kotak Mahindra Bank (20.00). ICICI Bank’s quarterly profit growth (25.71%) is higher than Axis Bank (4.92%) and IndusInd Bank (17.29%) but lower than HDFC Bank (35.91%). ICICI Bank’s ROCE (6.32%) is comparable to its peers, with HDFC Bank at 6.24% and Kotak Mahindra Bank at 6.86%. Overall, ICICI Bank’s performance is competitive within the industry, with strong profit growth and a relatively high market cap, although its P/E ratio is slightly higher than some of its peers.
Is This Stock Overvalued or Undervalued?
Based on the provided data, ICICI Bank’s stock appears to be slightly overvalued. The current market price of ₹1,070 is higher than the intrinsic value of ₹1,015.63, indicating a premium of ₹54.37 or about 5%. Additionally, the stock is trading at a price-to-earnings ratio (P/E) of 17.7, which is higher than the industry median of 12.61. The stock is also trading at 3.52 times its book value of ₹307, suggesting that the market is pricing in significant growth expectations.
Should We Buy This Stock and Why?
Investors should approach ICICI Bank’s stock with caution. While the bank has demonstrated strong profit growth (34.6% CAGR over the last 5 years) and has a high EPS of ₹60.63 (TTM), there are some concerning factors to consider:
- High debt-to-equity ratio of 6.53
- Low interest coverage ratio
- Significant contingent liabilities of ₹51,22,409 crores
- Fluctuating operating profit margins (36% in Mar 2023)
The promoter holding remains constant at 0%, which may not instill confidence in some investors. Given the high valuation and potential risks, investors should carefully assess their risk appetite and investment horizon before making a decision.
How Is the Industry of This Company Growing?
The banking industry in India, particularly the private sector, has been growing steadily over the past few years. ICICI Bank, being one of the largest private sector banks, has benefited from this growth. The bank has recorded a compounded sales growth of 14% over the last 5 years and 13% over the last 3 years. The industry’s growth can be attributed to factors such as increasing financial inclusion, digitalization of banking services, and a growing middle class.
However, the industry also faces challenges such as non-performing assets (NPAs), heightened competition, and regulatory pressures. ICICI Bank’s peers, such as HDFC Bank and Kotak Mahindra Bank, have also shown strong growth in recent years. The median quarterly profit growth for the industry stands at 18.73%, indicating a positive trend. Investors should monitor industry-specific risks and regulatory developments while assessing the growth potential of banking stocks.
Risk Factors related to ICICI Bank and the banking industry:
Business/Commercial Risks:
- Intense competition from other private sector banks, public sector banks, and foreign banks
- Rapidly evolving technology and digital disruption in the banking sector
- Economic slowdown or recession affecting credit growth and asset quality
- Exposure to sectors vulnerable to economic cycles, such as real estate and infrastructure
Regulatory Changes:
- Changes in interest rates by the Reserve Bank of India (RBI) affecting net interest margins
- Stricter regulations on non-performing assets (NPAs) and provisioning norms
- Implementation of Basel III norms, requiring higher capital adequacy ratios
- Amendments to banking laws and regulations affecting operations and profitability
Key Risks Associated:
- Credit Risk: Deterioration in asset quality leading to higher NPAs and provisions
- Market Risk: Volatility in interest rates, foreign exchange rates, and equity prices affecting treasury operations
- Liquidity Risk: Mismatch in asset-liability maturities leading to liquidity crunch
- Operational Risk: Frauds, cyber-attacks, and system failures disrupting business continuity
Risks to Consider Before Investing:
- Concentration risk in certain sectors or geographies
- Exposure to vulnerable segments, such as unsecured retail loans or small and medium enterprises (SMEs)
- Dependence on wholesale funding sources, such as bulk deposits and interbank borrowings
- Governance and management risk, particularly related to lending practices and risk management
Potential Risks of the Banking Industry:
- Systemic risk arising from interconnectedness among banks and financial institutions
- Macroeconomic risks, such as inflation, currency fluctuations, and political instability
- Disruptive technologies, such as blockchain and peer-to-peer lending, challenging traditional banking models
- Climate change and environmental risks affecting the quality of assets and investments
Management Quality Assessment
Based on the information available, there are no reported criminal cases against the current promoters and management of ICICI Bank. The bank has a well-established management team with extensive experience in the banking and financial services industry. However, in the past, there have been controversies related to the bank’s corporate governance practices, particularly involving the former CEO, Chanda Kochhar, and her alleged conflicts of interest in lending decisions. The bank has since taken steps to strengthen its governance framework and risk management practices.
Recommendation: CAUTION – While ICICI Bank has demonstrated strong performance in terms of profit growth, operating margins, and asset quality, investors should be cautious of the high debt-to-equity ratio, low interest coverage ratio, and significant contingent liabilities. The bank’s exposure to vulnerable sectors and the evolving regulatory landscape in the banking industry also warrant close monitoring. Investors should assess their risk appetite and thoroughly review the bank’s financial health, management quality, and corporate governance practices before making an investment decision.
Long-term Performance (6-10 years)
ICICI Bank has demonstrated strong growth in the past, with a 10-year compounded sales growth of 10% and a profit growth of 14%. The bank’s return on equity has averaged 12% over the past 5 years and 15% over the last 3 years, indicating consistent value creation for shareholders. The bank’s extensive branch network, diversified product offerings, and focus on digital banking are likely to support its long-term growth. However, the high debt-to-equity ratio and the evolving regulatory landscape in the banking sector may pose challenges. Investors should monitor the bank’s asset quality, capital adequacy, and risk management practices.
Short-term Performance (2-5 months)
In the short term, ICICI Bank’s performance may be influenced by various factors such as quarterly results, economic conditions, and market sentiment. The bank is expected to deliver good quarterly results, as indicated in the pros section. The bank’s strong profit growth and healthy operating margins may support its short-term performance. However, the stock’s high valuation, with a P/E ratio of 17.7 compared to the industry median of 12.61, may limit its upside potential in the near term. Investors should also keep an eye on the bank’s asset quality and any short-term fluctuations in the stock market.
Medium-term Performance (2-6 years)
Over the medium term, ICICI Bank’s performance will depend on its ability to sustain its growth momentum, maintain asset quality, and navigate the competitive landscape in the banking industry. The bank’s strong franchise, wide customer base, and focus on technology-driven services are likely to support its growth. The bank has delivered a 5-year compounded sales growth of 14.3% and a profit growth of 34.6%, indicating robust medium-term performance. However, investors should monitor the bank’s asset quality, particularly in the context of the COVID-19 pandemic and its impact on the economy. The bank’s ability to manage its high debt levels and maintain a healthy capital position will also be crucial.
Recommendation: CAUTION – While ICICI Bank has demonstrated strong growth and profitability, the high debt-to-equity ratio, low interest coverage ratio, and significant contingent liabilities warrant caution. The stock’s valuation is also on the higher side compared to its peers. Investors should carefully assess their risk appetite and investment horizon before making a decision. Those with a long-term perspective and a higher risk tolerance may consider investing in the stock, given the bank’s strong franchise and growth potential. However, investors should closely monitor the bank’s financial health, asset quality, and risk management practices.