Monday, February 27, 2012

South Indian Bank’s Outlook Negative if QIP Gets Through

VA Joseph, MD & CEO, South Indian Bank Ltd
Investors in South Indian Bank (BSE: 532218, NSE: SOUTHBANK) stock counter may be in for a rough ride if the private sector lender’s plan for a Rs. 1000 crore Qualified Institutional Placement gets through.

At the same time, SIB badly needs the fund infusion if it is to meet the next three-years’ growth targets. The Thrissur based traditional private sector bank’s Capital Adequacy Ratio is now only 14%.

According to market sources the issue is expected to be of 40 crore additional shares, which means the issue will be priced at around Rs. 25. An alternate view doing the rounds is that the QIP will be priced at Rs. 29 a share, which means that the issue will feature only 34.50 crore shares.

Anyway, for existing and prospective investors, the QIP signals at a massive dilution, as the current equity base is only Rs. 113 crore made up of 113 crore shares of Face Value Rs. 1.

The dilution involved is more than 35%, which means the EPS will go down by that much.

It is not clear why this relatively small-sized private sector bank wants to go such a large issue at one go that involves this kind of significant dilution. VA Joseph, CEO of SIB was unavailable for comments when contacted for this story.

A much more prudent strategy seems to be to go in for a capital raise in tranches like its 2007 QIP for Rs. 326 crore, which will give the bank enough time to grow its earnings, thus offsetting the negative impact of dilution to an extent.

Though the bank is growing at a reasonable pace, bottomline growth is getting sluggish on a QoQ basis.

Though the bank wanted to hive-off its gold loan business into a subsidiary, RBI had not allowed it. Almost 10% of SIB’s business is gold loans, which is a segment witnessing tumultuous regulatory changes these days. In many of SIB’s branches, gold loans is almost the sole business.

It will be interesting to watch the stand taken by large investors in the bank, as this QIP is detrimental to their interests in the short to intermediate term.

South Indian Bank’s largest investors are India Capital Fund, Fidelity, LIC of India, and Morgan Stanley.

Like most private sector banks, South Indian Bank doesn’t have a promoter group, and is supposedly professionally managed. And like most private banks, its largest investors are Foreign Institutional Investors (FIIs) and NRIs who together hold close to 49%, the maximum permissible under Indian regulations.

South Indian Bank scrip which is prone to high volatility, had a lacklustre year in the year-to-date period, but had recently soared with the market.

Now along with other bank scrips it has started correcting, and is likely to correct more as it is very expensive now with a TTM P/E of 8.15 and P/BV of 1.74.

Karnataka Bank, a comparable player by way of revenue and assets, is trading at a P/E of 7.47 and a P/BV of just 0.78, despite a run-up there.

Usually, in the run up to a QIP, stocks appreciate, but soon fall steeply as the impact of the dilution sinks in and large institutional investors trim their positions.

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