ICICI Bank's Kamath: Thinking long term

India Inc. may be grumbling about the tightening of liquidity and fears of a slowdown, but Kundapur Vaman Kamath, CEO & Managing Director of ICICI Bank, sees nothing but growth and investment opportunities. In fact, the man is so bullish that he's willing to risk miffing the bank's investors and put his weight behind a $5-billion (Rs 20,500-crore) IPO that's not just ICICI's, but India's, biggest yet. But the question that almost everyone's asking on Dalal Street is, does ICICI Bank need to raise so much money? "We were expecting an equity issue from the insurance holding company," says a surprised Vishal Goyal, banking analyst at Edelweiss Capital. "ICICI Bank has a history of frequent capital expansion," complains another. "This time there is no story to back its large equity issue."

The analysts' concerns aren't entirely misplaced. ICICI Bank does have a comfortable capital adequacy ratio (car) of 12 per cent as on March 31, 2007. That's a higher figure than those of HDFC Bank (11.41 per cent), UTI Bank (11.08 per cent), and SBI (11.80 per cent). And just four months ago, the bank raised $2 billion (Rs 8,800 crore) through an overseas bond offering. Says Edelweiss' Goyal: "The market dynamics have changed. There are now asset quality issues due to rising interest rates and any overhang of equity may actually depress the stock price in the short term."

If Kamath isn't too worried about the market's reaction, it's because, as the CEO, his concern is long term. "We have to position ourselves to take advantage of the growing opportunity in the Indian corporate as well as consumer space," says Kalpana Morparia, the bank's Joint Managing Director. Over the last four years or so, ICICI has grown at 30-35 per cent a year and, Morparia says, it is looking at a sustained growth of at least 25 per cent over the next four. "There is a strong corporate investment pipeline. They need something like half a trillion dollars in the next three years. That's a huge opportunity. Rural India is yet another market growing at a fast pace," says Morparia.

The banking landscape is changing in more ways than one. India Inc.'s appetite for big investments, both in India and abroad by way of large M&A deals, has grown. At the same time, banking norms have become stricter. The Reserve Bank of India's new capital adequacy guidelines require a minimum tier-I car of 6 per cent as against the existing 4.5 per cent. In addition, the new norms stipulate a risk weightage of 75 per cent for all residential mortgages (except loans below Rs 20 lakh, where the risk weight has been temporarily reduced to 50 per cent) and 125 per cent for other consumer loans. In addition, the RBI now requires substantially higher capital requirements for incremental unrated corporate exposure.

All this has put additional burden on the fastest growing big bank in the country, and the $5-billion IPO will create plenty of capital buffer. For starters, ICICI's car will swell to 15 per cent in the first year. Also, the tier-I window will be enhanced to accommodate another 100 per cent of tier-I and 50 per cent of tier-II capital (in the case of banks, tier-II capital, which is largely debt, is linked with tier-I capital). The IPO, which offers relatively low-cost capital, will mean that ICICI will not be left scrambling for funds when a lucrative financing deal arises, or the market gathers further momentum.

Meanwhile, the impact of such a massive equity dilution would be to lower ICICI's return on equity by 4-5 percentage points. In fact, the stock market is already hammering the bank's stock in anticipation of it. Another question that analysts are asking is whether the market will be able to absorb an IPO of this size. "There is a lot of interest in the market. In fact, look at the fund mobilisation by the insurance and mutual fund companies," says Morparia. But timing could be an issue. Says R. Swaminathan, Associate Vice President at IDBI Capital Market Services: "Liquidity is a point-in-time issue, besides which DLF's IPO (expected to raise more than Rs 10,000 crore) is likely to hit the market around the same time."

A valid concern, but there's no doubt that ICICI's mega offering will catapult the country's second largest bank into the global league. It may even be able to displace the State Bank of India from its top slot in another three years in terms of balance sheet size. "As the population of India-headquartered MNCs grows, you need banks with critical size," says Morparia. If that means taking some short-term risks, so be it.

Jindal and the Gift Horse
Bengal hands over 4,300 acres to Jindal, but he isn't happy.

JSW Steel's Jindal: Deal time

In this day and age, any industrialist who gets 4,300 acres of land at a meagre Rs 1.9 lakh per acre should count himself lucky. And if the windfall happens to be in West Bengal, where land acquisition has snowballed into bloody fights between the state and the farmers, then the beneficiary should consider himself doubly lucky. But not Sajjan Jindal, whose JSW Steel has proposed to set up a 10-million-tonne steel plant in West Bengal under JSW Bengal Steel.

Reason? Jindal, who'll set up a 3 million tonne facility to begin with, isn't entirely happy with the deal, which offers the land on a 99-year-lease. "The Jindals will have to pay 95 per cent of the price upfront and pay a rent according to the prevalent rates there," says the state's Land and Land Reforms Minister Abdur Rezzak Molla. Says Biswadip Gupta, Joint Managing Director and CEO, JSW Bengal Steel: "The board of JSW Steel, which holds 89 per cent in JSW Bengal, will consider the offer. And then Sajjan Jindal, Vice Chairman and Managing Director of JSW Steel, is likely to meet Chief Minister Buddhadeb Bhattacharjee later this month to discuss the progress of the project and finalise the price of the land."

The Jindals may be playing hard to please, but they are keen on the project. They have overcome protests from environmental groups (partly by returning nearly 80 acres of forest land from the proposed site) and plan to buy another 500 acres from villagers directly. Considering that Jindal is promising investment of over Rs 35,000 crore, Buddhadeb may not mind sweetening the deal further.

-Ritwik Mukherjee

Ringing Maran Out
His exit could set back 3G spectrum auctions.

Dayanidhi Maran: Son stroke

Great uncle giveth, and great uncle taketh away. But now that Dayanidhi Maran has actually resigned from his post as the Union it and Communications Minister at the behest of his great uncle and Tamil Nadu Chief Minister, M. Karunanidhi, the focus has shifted to the work Maran leaves unfinished. Top of the list: allocation of spectrum for 3g services. Just before the family feud broke out-over a controversial poll published by a Tamil newspaper owned by Maran's younger brother and Sun TV supremo, Kalanithi, that portrayed DMK leader Karunanidhi's younger son M.K. Stalin as the preferred heir over elder son M.K. Azhagiri-Maran had been talking of announcing the 3g policy by July. Although, much to the chagrin of telecom operators, Maran had proposed auctioning spectrum, that was still welcome news in an industry faced with burgeoning growth but insufficient spectrum. The policy may still come out, but not by July end. Says Neeraj Aggarwal, Director, Boston Consulting Group: "While we might be speculating on the future, I think the telecom regulator (TRAI) has been very thorough and professional in formulating a policy. But yes, whenever there is a change in leadership, one could expect a delay." Few will deny that Maran's three-year stint as the IT and Communications minister was eventful. He pushed India's mobile revolution by cutting charges for various services such as broadband, long distance calls, and mobile roaming. When he took over office, there were 42 million mobile subscribers. Today, there are about 170 million. Most recently, Maran, who was instrumental in getting Nokia and Motorola to invest in his home state of Tamil Nadu, was making a case for greater broadband penetration. He wanted to increase the broadband connections from 2 million at present to 9 million by the end of 2007. When BT went to press, there were speculations that A. Raja, DMK minister in charge of environment and forest, would be given additional charge of it and Communications. But there was also speculation that Maran would be back in the seat in less than a month-that being the amount of time it would take Karunanidhi to forget and forgive.

-Kushan Mitra

DLF's Second Coming
The developer finally gets SEBI's nod to launch its IPO.

DLF's Singh: The wait is over now

There are no minority shareholders crying foul this time around, but DLF's long-awaited IPO still has a steep climb ahead. Wary of a real estate bubble, regulators have tightened norms for real estate IPOs. Restrictions on pre-public offer placements apart, a recent finance ministry fiat also limits the use of convertible preference shares as instruments of foreign investment in realty companies. Yet, if India's biggest real estate player has braved all the hurdles to make an offer in June that could fetch more than Rs 10,000 crore, it's because it needs money desperately. According to market sources, DLF has debts of around Rs 12,000 crore, with an average cost of about 12 per cent. With bankers being told to increase their risk weightage on real estate loans, DLF's further borrowings could get more expensive. But the fact remains, it needs money to fund its ambitious growth plans. According to its IPO prospectus, it plans to spend Rs 6,500 crore on acquiring and developing land in 62 cities by 2009. Its existing projects need another Rs 3,500 crore. That apart, it has plans of setting up townships (with UAE-based developer Nakheel LLC) and hotels in association with Hilton.

Despite the adverse market conditions, DLF officials, in a quiet period ahead of the offer, are sanguine. "There is no dearth of equity," says one executive, pointing out that less rigorous fund-raising methods such as the listing of project-specific Special Purpose Vehicles on less restrictive international exchanges such as the Alternate Investment Market (AIM), London, is a possibility. Or, there could a quasi-reit-like structure to take advantage of the huge lease properties that DLF has within its fold.

DLF officials point out that these options would be considered at a suitable time. Real estate, however, is a dynamic industry and needs quite a lot of cash across projects particularly in a downturn.

SPV-structured funds, however, are ring-fenced and not fungible for debt repayment. So, raising equity is critical for DLF's big plans. The much anticipated issue is expected to set valuation benchmarks for the industry, say analysts. A stock split last year to a share face value of Rs 2 and SEBI guidelines regarding such shares mean that the offer price cannot be below Rs 500. While many in the industry regard that expectation as a little steep given peer Unitech's existing market valuation of around Rs 37,300-odd crore, DLF is taking heart from the stupendous response to Country Garden Holdings, a Chinese real estate developer's public offer last month in Hong Kong. The issue was over-subscribed some 255 times when it was aiming to mop up $1.65 billion (Rs 6,765 crore). "There is tremendous appetite for real estate companies. Global real estate investors will drive the demand for the DLF issue," says a company official. Adding to the concern over valuations is the nearly 7-8 per cent appreciation in the rupee since the beginning of the year-foreign investors will have to shell out more.

So, what is the way out? Well, there shall certainly be a public offer. And it will get subscribed, because the buzz is that foreign bankers have been roped in for an informal hard underwriting-meaning that they will subscribe to the issue should the demand from investors not materialise. However, some things seem to be working for it. Its SEZ projects recently received government approvals. As one DLF watcher points out: "Investors may be convinced about the company and the Indian real estate opportunity, but will they be convinced about the valuations?" We won't have to wait too long for an answer.

-Shalini S. Dagar