IPO - Punjab & Sind Bank - Buy

IPO Analysis
Punjab & Sind Bank


Punjab & Sind Bank (P&SB) is the last public sector bank to get listed on the bourses. P&SB is coming with an initial public offer (IPO) of 4 crore equity shares of Rs 10 each. Of the total issue, 0.2 crore shares are reserved for employees; hence the effective net issue comes to 3.80 crore shares. The issue is priced at Rs 113-120 per share, with further 5 per cent discount offered to the retail customers and employees. The issue shall constitute 17.93 per cent of post-issue paid-up capital of the bank. At the upper price band, P&SB intends to raise Rs 480 crore and at lower band it will be Rs 452 crore.

This issue at higher end has been priced at one times of its book value at the end of September 30, 2010 and at lower end it is 0.94 times. This figure will improve further for the retail investors who will get five per cent discount on issue price. This is cheaper compared to other small size public sector banks like Vijaya Bank and Dena Bank which are trading at price to book value of 1.54 to 1.2 times respectively. But what really in favour of P&SB is its strong asset quality—net NPA of the bank stands at 0.44 per cent at the end of Q2FY11. Bank has drastically reduced its NPA in last five years from 10 per cent in FY05 to current level. This has been achieved by the bank by not going for one-time settlement that many other banks opted for. The bank held land as collateral in NCR region that helped it to recover most of its NPAs (since in last five years, land value of NCR has appreciated by many-fold). If we measure the bank’s valuation on the basis of PE, we again find it attractive. At the price band of Rs 113 -120 (without considering the discount of 5 per cent to retail investors), P/E is just at 4 times at higher price band compared to 6.44 and 5.75 for Vijaya Bank and Dena Bank respectively. Looking at the offer price and valuation of the bank we believe downward risk is very low. Though it may not give very high listing gain like many of recent issues by Government of India, it is good long-term bet, and hence we advise our readers to subscribe the issue.

The fund raised through IPO will be use to augment bank’s capital base to meet the future capital requirements arising out of the growth in its assets and for other general corporate purposes, including meeting the expenses of the Issue. It should be noted that in FY09, bank went for the capital restructure wherein its share capital was reduced from Rs 743.06 crore to Rs 383.06 crore and rest of the equity was converted into perpetual debt (Rs 160 crore) and preference shares (Rs 200 crore). The issue will help bank to increase its CAR from 13.04 per cent currently to little more than 14 per cent post-issue of equity shares with Tier I would be approximately above 9 per cent.

Regarding the bank’s financial performance, it has outperformed the industry average in last five years. During last five fiscals, P&SB has been able to achieve a CAGR of 36.24 per cent in net advances and total deposits have increased at a CAGR of 28.24 per cent. Though the bank lags in terms of return on assets compared to the industry peers, we feel it will catch up once it achieves 100 per cent CBS, which still is at nascent stage and increase its presence beyond northern part of India. Therefore we believe going forward it will catch the valuation of industry average and will give good return to its investors.