Enough has been written about how great an investment India's largest private sector bank, ICICI Bank (IBN), is. However, most investors are not aware of the embedded value in IBN's subsidiaries. A recent news item perhaps changed this lack of awareness.
On January 8, 2007, IBN's CEO, Kandapur Kamath, stated that he feels that IBN is undervalued and hinted at listing IBN's six subsidiaries in the next six months to unlock value. I agree with Mr. Kamath. In this article, I value IBN using a sum of parts analysis of its six biggest subsidiaries and IBN's core retail banking business. I believe that IBN's fair value is $42.1 billion, an upside of 38% from its current valuation.
The trio of IBN's subsidiaries – ICICI Prudential Life Insurance Company (74% stake and 9.6% market share), ICICI Lombard General Insurance Company (74% stake and 12.4% market share), and ICICI Prudential Asset Management Company (51% stake) – constitute the largest piece of IBN's strategy to unlock value. Notably, both IBN's life (growing at more than 100%) and general insurance (growing at 20%) businesses are the largest private players in India in their respective categories.
As recently as September 2007, Mr. Kamath stated that ICICI's combined stake in these businesses is valued at approximately $11 billion. This valuation is supported by capital commitments from leading financial investors such as Swiss Re, Nomura, Temasek, General Atlantic Partners, and Goldman Sachs (GS), who collectively bid $670 million for a 5.9% stake in the holding company for the above-mentioned businesses. Looking at the recent trends in listing gains on India's bourse, post-IPO valuation of these businesses may be as high as $13 billion.
ICICI Securities [I-Sec], IBN's investment banking and broking subsidiary, is perhaps going to be listed first. I-Sec has a strong retail franchise and solid growth plans. Notably, I-Sec has the largest client base of all brokerages in India. In addition, I-Sec plans to grow its current client base from 1.4 million to 2.5 million by FY2009 (the fiscal year ended March 31, 2009). Also, I-Sec plans to add 700 centers to its current tally of 270. In FY07, I-Sec earned $51 million. The broking business is a hot sector in India and listed brokerages routinely trade at 70 to 80 times trailing earnings (which I consider absurdly high). Given its growth prospects, I believe in an IPO, I-Sec would trade at 50 times trailing earnings, giving it a valuation of $2.5 billion.
ICICI Ventures Funds Management Company, another subsidiary in which IBN holds a 100% stake, is India's largest venture finance company with over $2 billion in management. According to an Economic Times article dated December 6, 2007, it plans to grow assets under management to $10 billion by 2010. The article also mentions that ICICI Ventures plans to raise a new $5 billion fund in 2008 and is in the middle of launching a $2 billion real estate fund and another $2 billion private equity fund. Considering its growth prospects, ability to capture deal flow, and strong brand name, I estimate value of ICICI Ventures in an IPO at approximately $0.5 billion.
ICICI Home Finance Company Limited [IHFCL], IBN's 100% subsidiary, provides home loans to aspiring Indian home-owners. Mr. Kamath indicated that he may also consider an IPO of ICHCL, which earned $12 million in FY07. Applying an earnings multiple of 35 (average of Indian home finance pure plays HDFC and Dewan Housing) to IHFCL FY07 earnings of $12 million, I value IHFCL at $0.4 billion.
Now, let us focus on IBN's core earnings. After removing the pro-rated FY07 earnings of IBN's above-mentioned subsidiaries, I estimate IBN's FY07 core earnings at $735 million. Using a 35 times earnings multiple, I value IBN at $25.7 billion dollars.
Investors should note that my investment thesis is subject to many potential risks. Any change in Indian stock market, and especially investor responses to IPOs, can delay IBN's ability to list its subsidiaries. IBN is subject to banking regulations and foreign investment rules, which can change unexpectedly to the detriment of foreign investors.
On a positive note, India's currency has appreciated in excess of 10% in 2007 and IBN's stock price will benefit from any further currency appreciation. Nevertheless, investors will benefit from holding IBN in their portfolios in the long term.
Author's note: For the purposes of calculations made in this article, 1 USD = 39.20 INR.