IDBI: Hold

Recommendation: Hold

Sanjiv Shankaran

A SIZEABLE increase in the provision for bad loans led to a significant decline in Industrial Development Bank of India's (IDBI) net profit for 2000-01.

IDBI's net profit for the year was Rs 691 crore.

Income from operations in 2000-01 was Rs 7,671 crore, marginally lower than the previous year's operating income of Rs 7,859.6 crore. IDBI's provision for non-performing assets (NPAs) is subtracted from the operating income. Consequently, rising provision for NPAs reduces operating income.

In 2000-01, the provision for NPAs increased by Rs 219 crore (28.29 per cent) to Rs 993.1 crore. The aggregate NPA in the IDBI's balance-sheet is 14.8 per cent, higher than the previous year's 13.4 per cent. The IDBI's total income for 2000-01 was Rs 7,834.8 crore, a shade lower than the previous year's Rs 7,859.6 crore.

The most important expenditure the IDBI incurs is interest on the money borrowed. Interest expenditure increased marginally in 2000-01 to Rs 6,594.9 (Rs 6,370 crore).

In the backdrop of a softening interest rate regime, the IDBI's cost of rupee borrowings has declined. In 2000-01, the cost of incremental rupee borrowing declined to 11.07 per cent from the earlier level of over 12 per cent. It is not merely the softer interest rate regime that has lowered the cost of incremental rupee borrowings. But the average maturity of the IDBI's borrowings has declined, thereby improving the cost reduction. The average maturity of incremental rupee borrowings has declined to 3.51 years from 5.19 years in the previous year.

The combined effect of a marginal fall in total income and an increase in interest expense led to a sharp fall in net profit for 2000-01. The net profit for 2000-01 was Rs 691 crore, lower by Rs 256 crore (27 per cent) in relation to the previous year.

The IDBI's earnings per share dropped to Rs 9.37 from the previous year's EPS of Rs 10.32. In 2000-01, the IDBI made a 3:5 bonus shares issue. The expansion of the equity base, post bonus, has been reflected in the EPS only modestly despite a decline in earnings. This is due to a reduction in the equity base involving restructuring of the government's holding.

The company declared a dividend of Rs 4.50 per share for 2000-01. The IDBI has announced that dividend for the full year will be paid on bonus shares. The IDBI shares trade at around Rs 26.50 leading to a price earnings multiple of 2.82 times the EPS. At the current price, the dividend on shares yield a handsome 16.98 per cent, tax-free.

Outlook: The quality of IDBI's loans remains the primary concern for the shareholders. Other than the loans made in the early- and mid-1990s turning bad, another development may have aggravated the problem a little.

In 2000-01, IDBI's total assets actually fell by 0.7 per cent to Rs 71,783 crore. Top-rung corporates that borrowed at relatively high interest rates a few years ago have begun to pre-pay their loans. The consequence of this is that residual loans are of a slightly lower quality and, therefore, the quality of the overall portfolio has been a shade eroded.

The quality of the portfolio continues to be the primary concern. IDBI's NPA level increased in 2000-01. Textiles- and steel-related loans are among the biggest contributors to the NPAs. In a milieu where these industries are likely to find the going difficult, the pattern and quantity of IDBI's exposure to these sectors is likely to impact adversely the way the stock is valued.

A new worry is the fate of Dabhol Power Company power project in Maharashtra. IDBI's total exposure to the project is Rs 2,158 crore. According to the company's top brass, this exposure is safe, at least for the moment as DPC has enough money to service the loan in the near-term. But the uncertainty surrounding the project is likely to be a cause for concern.

On the positive side, IDBI's cautious approach and its shift to relatively short-term lending may act as a quality check on incremental loans.

The company has appointed a consultant to help it transform itself into an universal bank. Given the number of grey areas there, the process may take some time.

For the moment, the IDBI stock has little downside risk. An improvement in the NPA situation could lead to capital appreciation. Therefore, shareholders may consider staying invested for now.

Pic.: The IDBI ED, Mr S. K. Kapur, and CMD, Mr S. K. Chakrabarty... The company's cautious approach and shift to relatively short-term lending may act as a quality check on incremental loans.

Picture by Parth Sanyal