Interesting articles on IFCI

I found these articles on some other sites, interesting enough to be shared:

It is reported on 14/Aug that Goldman acquired 20 lakh shares of IFCI in open market operation (at prices above Rs 60 per shares). The current holding is around 5.21 %. If IFCI sells the stake of 26% by issue of new shares, total stake will be around 31%. If they are forced to make general offer for at least 20% of remaining shares, and if it succeeds, it may get controlling stake of 51%. It is possible; IDBI (5%) and LIC (8%) may sell into 20% general offers. In short, they will have about 405 Millions shares (out of 804 Millions shares, including issue of 165 Millions of new shares)

If this happens, then following scenario may be noted:
1. Goldman is perhaps the largest security firm in the world with closest connection with US establishment (White House and FED). IFCI acquisition will be very miniscule investment for them. 5% investment might cost them Rs 153 crores (5% of 638 Mln shares x Rs 48 average price) Remaining 26% may cost them Rs 1600 crores (16 crore extra shares x Rs 105 rumored price). General offers for 20% will cost them 1200 crores. In short, 51% will cost them Rs 3000 crores appx. Or US$ 750 Millions

2. Goldman will have instant access to Loans and Advances of over Rs 13500 crores or US$ 3.5 Billions. It will help identify the leading borrowers for its investment banking side, and may raise IPO for such companies.

3. Goldman will also identify the NPA (already written off) companies, and may nurse them back to health by bringing them to market and raise IPO or make secondary offers. Thus, old written off debts might be recovered substantially (almost 100% in some cases) that may add straight to bottom lines.

4. Thus, in a matter of just 2 years, the EPS of IFCI may rise to over Rs 60 per shares as under: (I mentioned part of it in my previous post when I had shown target to Rs 300 to Rs 500 for IFCI without taking into account of it being taken over by foreign entity) a. Regular Earning = Rs 625 crores (5% Interest spread of Rs 13500 crores Advance - Operative expenses) = Rs 7.80 EPS b. Investment Earning = Rs 800 crores per year (from existing Equity and debt holding) = Rs 10 per share c. Recovery earning = Rs 1600 crores per year (from debt tribunals etc) = Rs 20 per share d. New Investment Banking income from IPO’s promoted by Goldman management - (Expected flow will be Rs 16000 crores per year or 5% fees/green shoes of such Gross Proceeds = Rs 800 crores or Rs 10 per share e. The expected EPS for next 3 years at least will be sum of a,b,c,d = Rs 7.80 (a) + Rs 10 (b) + Rs 20 (c) and + Rs 10 (d) = Rs 47.50 per share f. Presenting growth P/E ratio of at least 15 times (generally over 20 times), the stock price may zoom to Rs 712 in less than 18 months

5. However the above target has following caveats or Assumptions: a. IFCI is really bought by Goldman. If they don’t buy, everything will fall, and the price target may come down to modest Rs 150 (in 12 months) and Rs 300 (in 2 years) b. GOI does allow Goldman to change the name from IFCI and repeal IFCI Act, so that the company is fully privatized and no longer a GOI company c. Goldman does not go bust in the present sub-prime scenario. It is already in trouble to the extent of over US$ 30 Billions (including CDOs of Chrysler and Alliance Boots)

6. Following scenario may emerge as result a. IFCI may be turned into full fledged Investment Banking and Term Lending Institutions. It is possible, after 2 years, both activities may be separated and listed separately. There may be spin off b. It is also possible that Goldman may consolidate shares in the ratio of 2: 1 or existing 2 shares may be converted into 1 share (reverse split) to enhance the share value in absolute terms. (Goldman is US brokers with access to major pension funds. These funds usually buy stock having denominated value of US$ 15 or more). c. IFCI may come out with ADR issue to be traded on NYSE d. IFCI has Long Term Prospect of trading at Rs 700 or above in about 2 years from take over date.

What should be the value of a company which had a net worth of Rs1,105 crore on 31 March, a net worth that was positive chiefly because of the creation of a deferred tax asset of Rs2,682 crore, a revaluation reserve of Rs660 crore and grants received from the government to the tune of Rs184 crore?

What should be the value of a financial institution that had, out of total loans of Rs11,524 crore, as much as Rs4,501 crore considered doubtful of recovery?

The answer, as given by the market, is around Rs4,900 crore—that’s the market capitalization of IFCI Ltd.

IFCI’s stock price has appreciated by a multiple of five in 2007, rising from Rs12.60 per share at the beginning of the year to around Rs77 at present. There’s no doubt the company’s financials have improved: it has started making profits, it has cleaned up its balance sheet and made provisions for all its bad loans and it has been recovering some of the them. But the main reason for the rise in the stock has been the proposal to induct a strategic partner and the last date for submission of bids is 14 September. Recent reports indicate that insurance companies, banks and private equity investors have all thrown their hats into the ring.

Just what is it that the bidders hope to get? Analysts point to the reasons for the spurt in the stock. One reason given is that IFCI has substantial hidden assets, by which they mean the difference between the market value of IFCI’s substantial quoted and unquoted investments and their book value. The second is that IFCI and its subsidiaries already have licences for operating in merchant banking, venture capital, asset reconstruction and in areas across the financial spectrum, which will save a prospective buyer a lot of time in getting these permissions and also allow whoever takes a stake in the company to unlock the potential of these businesses. Continuing government support to IFCI, with funds earmarked for the institution in this year’s budget, is also cited as a positive. Foreign players who currently do not have the required licences should be the ones most interested.

There is no doubt that IFCI can make a handsome profit by selling some of its investments. That is precisely what it did last year, selling off part of its stake in the National Stock Exchange and in Icra. The profit on these transactions amounted to Rs794 crore and formed 40% of IFCI’s income from operations in FY2007. The difference between the market value and book value of quoted investments as on 31 March was Rs492 crore. Of course, it could also be argued that selling off such investments is nothing but asset-stripping. Nevertheless, operating profits in the first quarter of FY08 were Rs158 crore, compared with Rs49 crore in the same period of last year.

On the other hand, the banks and financial companies that hold IFCI’s preference shares have had to roll over their holdings because the shares couldn’t be redeemed due to “inadequacy of profits and inability to issue fresh capital.” The expression of interest document specifically states that while IFCI’s capital adequacy ratio is 14.04%, that includes the deferred tax assets carried in the balance sheet. “In case the deferred tax assets carried in the balance sheet are deducted from the Tier-1 capital as per RBI guidelines for Bank (sic), the CAR will stand negative,” says the document.

But here’s the nub of the issue. Is the attraction of IFCI so potent that it now has a higher market capitalization than well-capitalized, well-run and profitable banks such as Allahabad Bank, Andhra Bank, Corporation Bank and Syndicate Bank, with their large branch networks and massive deposits, not to speak of smaller banks such as Federal Bank, Karnataka Bank, Vijaya Bank, Bank of Maharashtra and several subsidiaries of the State Bank of India? If this is what a proposal to offer 26% of a financial institution that has been hardly doing any business for years does to the stock, it should set the government thinking of the value that can be unlocked if it offers minority stakes to strategic investors in public sector banks.

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Foreign banks, investors bid for IFCI stake
Sat Sep 15, 2007 6:32pm IST

NEW DELHI (Reuters) - GE Capital Corp, Shinsei Bank, Natixis and Blackstone have put in preliminary bids for at least 26 percent in IFCI Ltd, an official of the Indian lender said on Saturday.

"We have received expressions of interest from 10 applicants including three consortia," said Sanjoy Chowdhury, an executive director of IFCI.

The single bidders are GE Capital Corp, Blackstone Group, New Bridge Asia, Cargill Financial Services, French bank Natixis, and Indian lenders IDFC and Kotak Mahindra Bank, he said.

WL Ross & Co has tied up with Goldman Sachs, Standard Chartered and India's Housing Development Finance Corp while India's Sterlite Industries have formed a consortium with Morgan Stanley for the bid, he said.

Japan's Shinsei Bank, U.S. investor J.C. Flowers and India's state-run lender Punjab National Bank is the other grouping, Chowdhury added.

IFCI shares risen more than sixfold so far this year, lifting its market capitalisation to $1.25 billion. It fell 1.8 percent to 77.20 rupees on Friday.

In March, IFCI appointed Ernst & Young (E&Y) to help it find a partner who could offer financial support and expand its business. In August, IFCI invited expressions of interest from potential investors.

"We are looking for a strategic fit," said Atul Kumar Rai, the chief executive officer of IFCI