SECURITY ANALYSIS

AND PORTFOLIO
MANAGEMENT
PROJECT
Submitted To:
Prof. R.K ARORA

Submitted By:
Group 3
Debarun Misra (15PGDM018)
Gautam Krishnakumar (15PGDM019)
Harshit Kumar (15PGDM020)
Henna Wadhwa (15PGDM021)

ACKNOWLEDGEMENT

With the completion our Security Analysis and Portfolio Management Project, we express
our earnest gratitude to Prof. R.K Arora for his superlative guidance and unflinching support
throughout the project work. No development would have been feasible had it not been for
his excellent supervision, constant encouragement and careful perusal. His support was very
important in the completion of our report and to give it the final shape.

CONTENTS

Contents
Executive Summary ................................................................................................................................ 4
INDUSTRY ANALYSIS................................................................................................................................ 5
Introduction ........................................................................................................................................ 5
ICICI BANK- Company Analysis ................................................................................................................ 8
History ..................................................................................................................................................... 8
Channels .............................................................................................................................................. 9
ICICI Bank Products and Services ........................................................................................................ 9
Deposits .............................................................................................................................................. 9
Loans ................................................................................................................................................... 9
ICICI bank's future plans ................................................................................................................... 14
Financial Statement Analysis- ICICI Bank Limited ................................................................................. 16
Valuation- Stock Price, ICICI Bank Limited ............................................................................................ 24
Valuation by comparable / relative valuation: ................................................................................. 24

Price to Earnings Ratio .......................................................................................................... 24

Price to Book Value Ratio ...................................................................................................... 24

Per cent Yield ........................................................................................................................ 24

EV/Sales ratio ........................................................................................................................ 24

EV/EBIT Ratio ........................................................................................................................ 24

Market Cap to Sales Ratio ..................................................................................................... 24

Relative Valuation Analysis ................................................................................................... 25

General assumptions for analysis:................................................................................................. 25

Valuation By Comparables ................................................................................................................ 25
Dividend Discount Model: ................................................................................................................ 26
Technical Analysis for ICICI Bank stocks................................................................................................ 26
Moving Average ................................................................................................................................ 27
Relative Strength Index ( RSI ) ........................................................................................................... 29
MACD ................................................................................................................................................ 30
Recommendations: ............................................................................................................................... 31

Executive Summary
The Security Analysis and Portfolio Management project has been done to understand the
Banking sector of India. We also gain an insight on how have some of the Indian banking
companies performed over the past years. The industry analysis has been done for an indepth understanding of the industry.
In our project, we take you through the banking industry in general and ICICI bank in
particular. We have then done an in-depth analysis of the ICICI Bank using various financial
ratios, technical analysis and valuation of its stock prices.
ICICI Bank is one of the most valuable banks in India in terms of market capitalization and is
ranked amongst the top companies listed on the Indian stock exchanges. It has been
compared to the industry averages, and then recommendations have been made regarding
the performance of the bank.
The report helps to understand how to analyse the sector and the various uses of the
analysis. Using financial ratios, technical analysis and valuation of stocks using different
methods, we are able to forecast the financial position of ICICI Bank and its future growth
prospects.

INDUSTRY ANALYSIS
Introduction
As per the Reserve Bank of India (RBI), Indias banking sector is sufficiently capitalized and
well-regulated. The financial and economic conditions in the country are far superior to any
other country in the world. Credit, market and liquidity risk studies suggest that Indian banks
are generally resilient and have withstood the global downturn well.
Indian banking industry has recently witnessed the roll out of innovative banking models like
payments and small finance banks. The central bank granted in-principle approval to 11
payments banks and 10 small finance banks in FY 2015-16.RBIs new measures may go a
long way in helping the restructuring of the domestic banking industry.

Past sales and earnings performance

The sales performance is reflected as steadily rising with the net income rising to 3 lakh crore
from 1.5 lakh crore i.e. doubling in almost 5 years and the net profit rapidly rising from 0.55
to nearly 0.95 crore in about 4 years from 2010 to 2013 and then taking a dip due to the
economic conditions and rising costs of expansion and technological innovation and
infrastructure.

Sensitivity to Business Cycle

Banking Industry is a cyclical industry and is affected by the boom and recession periods in
the economy. The sensitivity with sales is shown in the above figure and is shown to be less
volatile comparing the last few years post the recession of 2008-09.

The industrys DOL is, which means that fixed costs for the industry are more than the
variable costs, allowing it to operating leverage, and thus the industry is more sensitive to the
business cycle. It will rise and fall more than the market.
Competitive conditions and barriers to entry
Barriers to
Entry

Licensing requirement, investment in technology and branch network, capital

and regulatory requirements.

The competitive conditions can be best described by the Porters Five Forces model
framework:-

Stock prices relative to earnings

The stock prices and earnings for the private and public sector banks can be described by the
following charts showcasing their relative performance.

Stage in industry life cycle

The banking industry can be categorized into a stage of entering maturity but at the same time
new players are entering the industry and the role of political and economic aspect in the
current industry means that the robust asset growth, higher ATM penetration and rising rural
penetration.
The new growth promoting trends observed in the banking industry are:

Improved Risk Management Practices.

Diversification of Revenue Stream.
Technological Innovations leading to increased penetration of net banking customers.
Focus on financial inclusion.
Derivatives and Risk Management Products.
Consolidation and focus on Jan Dhan Yojana.
KYC and Wide Usability of RTGS and NEFT.

The growth drivers are:Economic and demographic drivers.

Policy Support and tech innovation, infrastructure financing, policy support
Schemes like Pradhan (Mantri Suraksha/Jeevan Jyoti) Bima Yojana, Atal pension
yojana, Pradhan Mantri Jan Dhan Yojana.

Operating and Financial Leverage

The degree of operating leverage is around 70% to 80% for most banks due their extremely
high operating efficiencies and also the financial leverage is also around that range (80%)
based on the comparison of the banks in both sectors, public and private.
Opinion on the investment prospects in the industry
The best prospects currently in the industry taking both the public and private sector banks
would be SBI, Indian Bank among the public sector banks and Axis, HDFC and ICICI banks
according to their financials.

ICICI BANK- Company Analysis

History
ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial
institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was
reduced to 46% through a public offering of shares in India in fiscal 1998, an equity offering
in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of
Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary market sales by
ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at
the initiative of the World Bank, the Government of India and representatives of Indian
industry. The principal objective was to create a development financial institution for
providing medium-term and long-term project financing to Indian businesses.
In the 1990s, ICICI transformed its business from a development financial institution offering
only project finance to a diversified financial services group offering a wide variety of
products and services, both directly and through a number of subsidiaries and affiliates like
ICICI Bank. In 1999, ICICI become the first Indian company and the first bank or financial
institution from non-Japan Asia to be listed on the NYSE.
After consideration of various corporate structuring alternatives in the context of the
emerging competitive scenario in the Indian banking industry, and the move towards
universal banking, the managements of ICICI and ICICI Bank formed the view that the
merger of ICICI with ICICI Bank would be the optimal strategic alternative for both entities,
and would create the optimal legal structure for the ICICI group's universal banking strategy.
The merger would enhance value for ICICI shareholders through the merged entity's access
to low-cost deposits, greater opportunities for earning fee-based income and the ability to
participate in the payments system and provide transaction-banking services. The merger
would enhance value for ICICI Bank shareholders through a large capital base and scale of
operations, seamless access to ICICI's strong corporate relationships built up over five
decades, entry into new business segments, higher market share in various business segments,
particularly fee-based services, and access to the vast talent pool of ICICI and its subsidiaries.
In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of
ICICI and two of its wholly-owned retail finance subsidiaries, ICICI Personal Financial
Services Limited and ICICI Capital Services Limited, with ICICI Bank. The merger was
approved by shareholders of ICICI and ICICI Bank in January 2002, by the High Court of
Gujarat at Ahmedabad in March 2002, and by the High Court of Judicature at Mumbai and
the Reserve Bank of India in April 2002. Consequent to the merger, the ICICI group's
financing and banking operations, both wholesale and retail, have been integrated in a single
entity.

Channels

ICICI Bank has the following channels through which it offers its products and services to its
customers.
Branches
ATMs
Internet Banking
Mobile Banking
Phone Banking

ICICI Bank Products and Services

ICICI Bank offers a host of products and services to its clients, which include Deposits,
Loans, Cards, Investments, Insurance, Demat, NRI Services and Online Services etc.

Deposits
Following deposits are offered:

Savings Account
Advantage Deposit
Special Savings Account
Life Plus Senior Citizens Savings Account
Fixed Deposits
Security Deposits
Recurring Deposits
Tax-Saver Fixed Deposit
Young Stars Savings Account
Child Education Plan
Bank@Campus
Salary Account
Advantage Woman Savings Account
EEFC Account
Resident Foreign Currency (Domestic) Account
Privilege Banking
No Frills Account
Rural Savings Account
People's Savings Account
Self Help Group Accounts
Outward Remittance
Freedom Savings Account
Family Banking

Loans
ICICI Bank offers following loan facilities:

Home Loans
Loan Against Property
Personal Loans
Car Loans
Two Wheeler Loans
Commercial Vehicle Loans
Loans Against Securities

Loan Against Gold Ornaments

Pre-approved Loans

ICICI Home Loans

ICICI Bank is the largest provider of Home Loans in India. ICICI Home Loans offer
unbeatable benefits to ensure that its clients get the best deal without any hassles. ICICI Bank
Home Loans provide loans not only at competitive interest rates, but also are so designed that
they cater to the specific needs of consumers.
New products / New features in existing products are introduced from time to time based on
customer feedback. ICICI Bank offers easy home loans for purchase or construction of flat or
house.
The benefits associated with ICICI Home Loans which give them an edge over other players
in the market are:
Attractive and customer friendly loan interest rates

Loans as low as INR 0.2 million is available

Term loans up to 20 years is available
Loans come with a Free Personal Accident Insurance Policy
Premium charged in case of insurance options for Home Loans is also attractive.
Simplified Documentation
Doorstep Service
Home Loans can be sanctioned even before selecting a property
(All the above facilities are situational and subject to changes according to the company's
discretion.)
With varied offering of house loans and home finance, ICICI Bank Home Loans provide a
variety of options to its customers from which they can choose the one that suits them the
best.
The various policies or terms of ICICI Home Loans are:

Fixed Rate Home Loan

Adjustable Rate Home Loan or Floating Rate Home Loan
Partly Fixed and Partly Floating Rate Home Loan
Smartfix Home Loan
Moneysaver Home Loan
The other types of loans include Land Loans, Office Premises Loans, Home Improvement
Loan and Home Loan for NRI. One can also leverage his/her existing property to get a Loan
against Property, Property Overdraft or Lease Rental Discounting. All of these are available
at a fixed rate or an adjustable rate of interest.
Another significant feature of ICICI Home Loans is that it allows the customer transfer the
balance of his/her existing home loan from other banks. Moreover, the Home Loans are also
liable to tax benefits.
Thus, for all good reasons mentioned above, ICICI Home Loans have been and will be the
most sought after in the distant future.

ICICI Bank Credit Cards

10

The provision of paying for an expensive commodity in easy instalments is the basic
advantage of using a credit card. An ICICI Credit Card provides the facility of cash,
convenience and a range of benefits, anywhere in the world.
The benefits associated with ICICI Bank Credit cards are:

Free cards for a lifetime

Insurance benefits
Global emergency assistance service
Discounts
Utility payments
Travel discounts and and a few others.

ICICI Bank also offers a range of cards, each designed for a specific purpose as follows:
Premium Card
Co-branded Card
Classic Card
Affinity Card
Picture Card
Corporate Card
EMI Card
Preferred Card
Value for Money Card

The Premium Credit Card from ICICI Bank provides the card bearer, the benefits of owning
an exclusive Credit Card for his/her convenience and usage. The card includes special deals
to complement the bearer's lifestyle. Other cards in this category include Super Gold Credit
Cards, Platinum Credit Cards along with Travel Cards for Airmiles, the best holiday
packages and air tickets. A Golf Credit Card comes with a free membership of the Indian
Golf Union along with special Golfing benefits.
The Co-branded Credit Card provides access to various useful commodities the consumption
of which would otherwise be expensive. For example an ICICI Bank Co-branded Card of a
departmental chain can enable the consumer to buy commodities at a lesser cost than he
would normally have to do without the card.
The Classic Credit Card category comprises the following:
ICICI Bank Sterling Silver Credit Card
ICICI Bank - American Express Green Credit Card
ICICI Bank Visa Mini Card
ICICI Bank Online Credit Card
EMI Credit Card provides unique credit facility, where the customer's monthly EAD (EMI
Amount Due) is fixed and inclusive of all charges. Any incremental purchases will not
increase the EAD paid by the customer but only result in the proportionate increase in the
tenure of repayment.
The Value for Money Credit Card is the first in India of its kind. A no-frills Card packed with
benefits that matter. India's only internationally valid Value for Money Photo Card offers an
unmatched combination of features and convenience.
Thus as the introduction on credit card facility has brought about a revolution in the world of
purchases, the ICICI Credit Card has only taken this facility to the next level much to the

11

convenience of its millions of users worldwide.

ICICI Bank Investments Plans

ICICI Bank Tax Saving Bonds

Mutual Funds
Government of India Bonds
Initial Public Offers (IPO) by Corporates
Foreign Exchange Services
ICICI Bank Pure Gold
Senior Citizens Savings Scheme, 2004
Insurance Plans

Home Insurance
Health Insurance
Health Advantage Plus
Family Floater
Personal Accident
Travel Insurance
Individual Overseas Travel Insurance
Student Medical Insurance
Motor Insurance
Car Insurance
Two Wheeler Insurance
Life Insurance
ICICI Pru LifeTime Gold
ICICI Pru LifeState RP
NRI Services By ICICI Bank

Following services are offered to the NRIs:

Money Transfer
Bank Accounts
Investments
Home Loans
Insurance
Loans Against FD
ICICI Mobile Banking
A user friendly automated service menu offers customers, a convenient access to their
accounts coupled with security. All the transactions are protected by a ATM PIN (Personal
Identification Number) which is a personal password to their respective Bank & Credit Card
Account and Tpin in case of Demat Account . Any additional assistance is provided by the
Phone Banking Officers (PBOs).

12

Self Phone Banking (IVR) Access Mechanisms are as follows :

For Deposits, customer needs to key-in his ATM or Debit Card Number and its
corresponding ATM PIN.
For Credit Cards , customer needs to key-in his 16 digit Card Number and its corresponding
ATM PIN.
For Demat Account Holders , customer needs to key-in his 14 Digit Demat Account Number
and its TPIN
For Bond Account Holders, customer needs to key in the Bond Holder Number only.
All the above facilities are obtained absolutely free of charge.
Some of the Phone Banking services offered by ICICI Bank are:
Bank services:

Account Balance
Mini Statement
Cheque Book Request
Cheque Status Enquiry
Stop Cheque Payment
Utility Bill Payment
Internet Userid
Mobile banking Registration
Card Services:

Outstanding Balance
Details of Last Statement
Details of Last Payment
Last five Transactions
Reward Points status

Demat Services:
ISIN query
Holding statement
Transaction History
Submitting Delivery Instructions
Request for Instruction Booklet
Information on Redemption:
Information on Interest
Information on Despatch of Bonds certificates

Other Services:
Loss or Replacement of card
Re-issue of ATM PIN
Standing Instructions
Complaints and suggestions
Inquire about any ICICI Bank product

13

ICICI Bank Informational Data

Name of Bank

ICICI Bank

No. of Offices

1408

No. of Employees

34596

Business per Employee (in ` Lakh)

1154.00

Profit per Employee (in ` Lakh)

11.00

Interest Income (in ` Crore)

31093

Other Income (in ` Crore)

7604

Interest Expended (in ` Crore)

22726

Operating Expenses (in ` Crore)

7045

Return on Assets

0.98

CRAR

13.96

Net NPA Ratio

2.09

Last Updated on 4/21/2015

ICICI bank's future plans

ICICI Bank is looking at expanding its fund-generation profile and revenue streams to
capitalize on the forthcoming opportunities.
"As we prepare ourselves for the next phase of growth, we will work on further diversifying
our funding profile and revenue streams," Kochhar said in her message to the country's
largest private sector bank's shareholders in its annual report .
Since 2007, as the global and Indian economic environment has changed rapidly, the bank
has focused on a conscious strategy of capital conservation, risk containment and efficiency
improvement.
"We have healthy capital adequacy, sound liquidity and improved cost efficiencies," she
added.

14

The bank's chairman K V Kamath also expressed confidence that 'the Indian economy's
robust fundamentals and domestic growth drivers will impart it the resilience to emerge
stronger from this period'.
"I believe the economic recovery, some signs of which are already visible, will gather
momentum in the coming months and in due course see India returning to a high growth
trajectory," he noted in his message to shareholders.
Kamath, who handed over the role of MD and CEO to Kochhar last month, further said, "The
last year has been an exceptionally challenging year for the global economy and financial
sector.
"India, while fundamentally in a much stronger position, has also experienced the impact of
these events as they were transmitted through the trade and capital channels."
Kochhar said that the against the backdrop of an imminent recovery in Indian economy, "The
ICICI Group sees before it a wide opportunity spectrum: increasing household incomes and
consumption in both rural and urban India; significant industrial and infrastructure
investment potential; and the vast Indian diaspora spanning the globe.
As a multi specialist financial services group, are well positioned to capitalize on these
opportunities. It will continue to participate in India's growth by meeting the financial
services needs of the Indian economy.

15

Financial Statement Analysis- ICICI Bank Limited

In any organization, the two important financial statements are the Balance sheet & Profit and
loss account of the business. Balance sheet is a statement of the financial position of an
enterprise at a particular point of time. Profit and loss account shows the net profit or net loss
of a company for a specified period of time. When these statements of the last few year of
any organization are studied and analysed, significant conclusions may be arrived regarding
the changes in the financial position, the important policies followed and trends in profit and
loss etc. Analysis and interpretation of the financial statement has now become an important
technique of credit appraisal. The investors, financial experts, management executives and
the bankers all analyse these statements. Though the basic technique of appraisal remains the
same in all the cases but the approach and the emphasis in analysis vary. A banker interprets
the financial statement so as to evaluate the financial soundness and stability, the liquidity
position and the profitability or the earning capacity of borrowing concern. Analysis of
financial statement is necessary because it help in depicting the financial position on the basis
of past and current records. Analysis of financial statement helps in making the future
decision and strategies. Therefore, it is very necessary for every organization whether it is a
financial or manufacturing etc. to make financial statement and to analyse it.
ICICI BANK
ICICI Bank is Indias second-largest bank with total assets of Rs. 918756.2 Crores at March
31, 2016 and profit after tax of Rs. 10926.89 Crores for fiscal 2015-16. ICICI Bank is one of
the most valuable banks in India in terms of market capitalization and is ranked amongst the
top companies listed on the Indian stock exchanges.
Purpose: To assess the past performance and current financial position of ICICI Bank
Ltd.

16

Analysis of Financials of ICICI Bank Ltd.:

FINANCIAL & OPERATING LEVERAGE
Degree of operating leverage: It refers to the percentage change in EBIT relative to the
percentage change in sales. The obtained value for DOL of ICICI Bank Ltd. for FY 20152016 is 0.04. This means that for a given change in sales, EBIT changes by 0.04 times the
sales value. It signifies the riskiness of companys operating income. As ICICI Bank Ltd. is
in banking sector, which has a higher investment in manufacturing plants (which is a fixed
cost), its operating leverage will be on the higher side for a given level of sales. This
company uses more fixed costs in comparison to variable costs.
Year
Degree of Operating Leverage(DOL)

2012
0.022

2013
0.186

2014
0.149

2015
0.058

2016
0.039

Degree of Operating Leverage(DOL)

0.2
0.18
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0

Degree of Operating
Leverage(DOL)

2012

2013

2014

2015

2016

Degree of financial leverage: It refers to the ratio of percentage change in earnings per share
to the percentage change in EBIT. The obtained value for DFL of ICICI Bank Ltd. is 1.54.
DFL is a measure of sensitivity of a companys EPS to fluctuations in its operating income.
In other words, it gives a measure of volatility of EPS. For ICICI Bank Ltd., for every 1 %
change in EBIT, the EPS changes by 1.54 times.
Year
Degree of Financial Leverage(DFL)

2012
2.428

2013
-15.598

2014
1.738

2015
0.169

2016
-0.019

17

Degree of Financal Leverage(DFL)

4
2
0
-2
-4
-6
-8
-10
-12
-14
-16
-18

2012

2013

2014

2015

2016
Degree of Financal
Leverage(DFL)

Measures of Financial Leverage:

1. Debt Ratio: It is the ratio of debt to total Assets. The debt ratio for ICICI Bank Ltd.
is obtained as 0.24. It compares companys total debt to its total assets. The lower the
value of debt ratio, the company is having stronger equity. ICICI Bank Ltd. has
sourced 23.9% of its total capital through debt. This is a measure of Capital gearing.

Debt Ratio
0.27
0.26
0.25
Debt Ratio

0.24
0.23
0.22
2012

2013

2014

2015

2016

2. Debt Equity Ratio: It is a solvency measure focusing on the amount of capital

provided by creditors. It shows how much lenders, creditors, suppliers etc have
committed to the company versus what shareholders have committed. The debtequity ratio for ICICI Bank Ltd. is obtained as 2.34. High debt equity ratios indicate
a preference to raise funds through debt financing as compared to equity financing.

18

Debt Equity Ratio

2.7
2.65
2.6
2.55
2.5
2.45
2.4
2.35
2.3
2.25
2.2
2.15

Debt Equity Ratio

2012

2013

2014

2015

2016

3. Interest Coverage Ratio: It is a measure of how easily a company can pay interest
expenses on outstanding debt. It basically indicates the capacity of the company to
repay its fixed financial charges. The lower the ratio, the more the company is
burdened by debt expenses. The interest coverage ratio of ICICI Bank Ltd. is
obtained as 0.78. When the companys interest coverage ratio is 1.5 or lesser, its
ability to meet interest expense is questionable. For ICICI Bank Ltd., its EBIT is 0.78
times the interest expenses. So it is in an alarming position to repay its interest
expenses. The reciprocal of this ratio is a measure of the firms income gearing.
However it doesnt indicate the future riskiness of the company and it is also a
measure of short term liquidity rather than leverage.

Interest Coverage Ratio

0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

Interest Coverage
Ratio

2012

2013

2014

2015

2016

19

RATIO ANALYSIS
Ratios
Current Ratio
Quick Ratio
Return on Assets
Return on Equity
Operating Profit to working ratio

2016
5.638271
0.434051
0.012525
0.122214
0.030501

2015
5.367992
0.336274
0.016447
0.16064
0.029069

2014
5.569225
0.382192
0.016417
0.16085
0.026975

2013
5.441645
0.423077
0.015655
0.155798
0.024282

2012
5.057069
0.363137
0.013768
0.136176
0.020976

Considering the liquidity ratios, the ideal ratio for current ratio is 2:1 and ideal ratio for
quick ratio is 1:1. In the above, table current ratio of all the years is higher than the ideal
ratio which shows that there is enough current assets which make the bank able to pay its
current liabilities on time. However, the quick ratio is lower than the ideal ratio which shows
that bank have not enough liquid assets to pay their current liabilities. Therefore, ICICI bank
should keep some assets in the form of liquid assets such as cash, marketable securities etc.
Return on equity, return on assets and operating profit to working funds are profitability
ratio. The higher the profitability ratio of any organization better is the position of that
organization. The profitability ratio of ICICI bank is very low. The return on assets and
Return on Equity is decreasing since 2013. However, Operating Profit to working ratio is
increasing every year.
Thus, ratio analysis of financial statement shows that bank/s current ratio is better than the
quick ratio. It means that ICICI Bank has invested more funds in current assets than the fixed
assets and liquid assets. Bank has given more advances to its customers and thus has less cash
in hand. Profitability ratio of the bank is lower than as compared to previous years. However,
the return on equity is better than the return on assets.

Comparison of ICICI Bank ratios with the Industry ratios

Performance Ratios

Performance Ratios
ROA(%)
ROE(%)
ROCE(%)

ICICI Bank
(2016)

Industry
(2016)
1.25
12.42
8.62

1.47
14.09
49.48

20

Performance Ratios
60
50
40
ICICI Bank (2016)

30

Industry (2016)

20
10
0
ROA(%)

ROE(%)

ROCE(%)

ROA:
Companys ROA is 1.25% which is less that industry average of 1.47%. This means that
companys management isnt utilizing the assets in efficient manner. The company has high
current assets which company can use more efficiently.
ROE:
Industry ROE is 14.09% and company ROE is 12.42%. It signifies that industry is giving
better returns on equity to the shareholders as compared to ICICI Bank. Thus, the future
growth prospects of ICICI Bank are dicey.
ROCE:
Companys ROCE is 8.62 % and industrys ROCE is 49.48 %. The industrys performance
is more than five times the rate of ICICI Banks performance. Companys efficiency in using
its equity is alarming.
Efficiency Ratios
ICICI Bank
Industry
Efficiency Ratios
(2016)
(2016)
Cost Income Ratio
60.52
43.01
Operating Costs to Assets
4.44
7.5

21

Efficiency Ratios
70
60
50
40

ICICI Bank (2016)

30

Industry (2016)

20
10
0
Cost Income Ratio

Operating Costs to Assets

Cost Income Ratio:

Cost/income ratio shows a company's expenses in conjunction with its income. This is done
by dividing the operating costs, which includes such items as salaries and property expenses,
by the operation income. Cost Income Ratio of ICICI Bank is 60.52 as compared to the
industry ratio which is 43.01. This means that the operating cost to operating income ratio is
higher for ICICI Bank, which is a negative indication.
Operating Costs to Assets:
The cost/assets ratio measures costs in relation to the size of a deposit taker (e.g. a bank). It
is: operating expenses average assets over the period. Operating Costs to Assets Ratio of
ICICI Bank is 4.4 as compared to the industry ratio which is 7.5. Since the cost is relatively
less for ICICI Bank as compared to industry, it is a good indication.
Growth Ratios

Growth Ratio
Operating Profit Growth
Net Profit Growth

ICICI Bank
Industry
(2016)
(2016)
-40.87
6.18
-15.57
7.48

22

Growth Ratios
10
0
Operating Profit Growth
-10
-20

ICICI Bank (2016)

Industry (2016)

-30
-40
-50

Operating profit growth shows the percentage increase in operating income over the last year.
The Operating Profit growth as well as Net Profit growth ratios is negative for ICICI banks as
opposed to the positive industry ratios. Thus, this is an alarming situation for the bank and
needs to take corrective measures for the same.

23

Valuation- Stock Price, ICICI Bank Limited

Equity Valuations Models: The purpose of fundamental analysis is to identify stocks that
are mispriced relative to some measure of true value that can be derived from the observable
financial data. Following models are used for valuation
o Valuation by comparable / relative valuation
o Dividend discount model
o FCFE model for valuation

Valuation by comparable / relative valuation:

Relative valuation, also referred to as comparable valuation, is a very useful and effective
tool in valuing an asset. Relative valuation involves the use of similar, comparable assets in
valuing another asset.
Parameters for Relative Valuation:

Price to Earnings Ratio: The price-earnings ratio (P/E Ratio) is the ratio for valuing a

company that measures its current share price relative to its per-share earnings.
Price to Book Value Ratio: The price-to-book ratio (P/B Ratio) is a ratio used to
compare a stock's market value to its book value. It is calculated by dividing the
current closing price of the stock by the latest quarter's book value per share.
Per cent Yield: The yield is the income return on an investment, such as the interest or
dividends received from holding a particular security. The yield is usually expressed
as an annual percentage rate based on the investment's cost, current market
value or face value
EV/Sales ratio: Enterprise-value-to-sales is a valuation measure that compares
the enterprise value (EV) of a company to the company's sales. EV-to-sales gives
investors a quantifiable metric of how much it costs to purchase the company's sales.
This measure is an expansion of the price-to-sales (P/S) valuation, which uses market
capitalization instead of enterprise value
EV/EBIT Ratio:

Enterprise value to earnings before interest and tax (EV/EBIT) is a measurement to

whether a share in a company is cheap or expensive, relative to competing firms or
the wider market. The EV/EBIT is a modified multiplier of the P/E ratio that
addresses the weaknesses of the P/E ratio. So instead of using just the firms share
price, it uses enterprise value; which includes debt. The EV is then compared to
earnings, before, rather than after tax and interest.

Market Cap to Sales Ratio:

Market cap to sales ratio also known as price to sales ratio indicates how the market is
valuing every rupee of the companys sales. It is used to compare the companies in
the same sector. It is also useful for valuation of a company that is incurring losses.

24

Relative Valuation Analysis:

For relative analysis various valuation ratio of stock of ICICI is compared with the
Industry average.
Industry average is calculated by taking average of five major competitors of ICICI,
which are Yes Bank, Axis Bank, HDFC Bank, IndusInd.
General assumptions for analysis:
o Stock and Industry are growing at the same rate
o Stock and Industry have same level of risk

Valuation By Comparables
Valuation Ratio
PER(x)
Adjusted PE (x)
Price/Book(x)
Yield(%)
EV/Net Sales(x)
EV/EBIT(x)
M Cap / Sales

Industry
HDFC Bank YES
Indusind Axis Bank ICICI
Average
14.37
25.18
12.69
13.51
21.16
17.38
14.37
25.18
12.69
13.51
21.16
17.38
2.64
3.33
1.98
1.51
3.64
2.62
1.16
0.47
1.12
2.11
0.89
1.15
5.03
6.88
5.08
6.04
5.42
5.69
5.35
7.57
5.68
7.41
6.39
6.48
2.69
4.97
2.56
2.32
4.29
3.37

Valuation relative to Industry Average

20
15
10
5

ICICI

Industry Average

Observations:
Lower PER resembles company is undervalued and hence a good option to
invest. At the same time it also indicates that investor is not much hopeful about
the stock and hence willing to pay lesser amounts for unit earing then the
industry average.
Lower PB ratio means stock is undervalued.
Higher dividend yield is good for investors but at the same time reflects less
potential for future growth
Higher EV/Sales ratio indicates higher value of company then the industry
average
A higher EV/EBITDA ratio indicated that share in the company is costlier then
the relative industry.
Lower the MarketCap/Sales ratio more lucrative is to invest in the same
company as the stock is undervalued.
25

Dividend Discount Model:

Constant growth model is used to calculate intrinsic value of ICICI stock.
Essentials for the calculation are taken from the financials of the company and annual report.
Value
Shares Outstanding
Average ROE
Average Payout Ratio
Average Growth
Rf
Rm
Risk Premium
Beta
Cost of Equity
Interest Paid Inter bank Borrowing (Crore INR)
Borrowing from RBI
Borrowing from other banks
Total inter bank borrowing
Cost of debt(Kd)
Kd (1-T)
WACC
Dividend per Share(March 2016)

Valuation Method

5.818E+09
12.343
28.31
8.8%
0.0719
0.0951
0.0232
2.03
11.90%
1558.73
11541.1
7620.29
19161.39
8.13%
5.37%
7.54%
5.00

Intrinsic Value of Stock (INR)

DDM Constant Growth Model

178.39

FCFE Model

260.67

Current market price is 244.48 INR

Intrinsic value of ICICI stock calculated comes out to be less than then its current market
price when calculated using constant dividend growth model.
Hence stock is overvalued and investing in this stick is not a viable option for investors.
At the same time intrinsic value comes out to be higher than current market price when
calculated using FCFE approach which shows that stock is undervalued and hence viable
option for investors to invest their money.

Which model to consider (DDM Vs FCFE):

Consider FCFE for firms which pay dividends which are significantly higher or lower
than the Free Cash Flow to Equity.
What is significant? As a rule of thumb, if dividends are less than 80% of FCFE or
Technicaldividends
Analysis
for ICICI Bank stocks
are greater than 110% of FCFE over a 5- year period, use the FCFE model)
As per calculations dividends paid (2908.78 Crore INR) is way less than FCFE which is
4250.46 Crore INR.
Hence FCFE model is to be preferred over DDM model.
and according to which stock is slightly undervalued and hence a good option for buy.
26

While performing the technical analysis of ICICI bank we have taken the historical data of its
stock prices for the past 1 year ie. From 18th Aug2015 to 17th Aug2015.
All the graphs, plots shown below are related to the ICICI bank stock prices for the past 1
year.
In finance, technical analysis is a security analysis methodology for forecasting the direction
of prices through the study of past market data, primarily price and volume.

Moving Average
A widely used indicator in technical analysis that helps smooth out price action by filtering
out the noise from random price fluctuations is the moving average. A moving average
(MA) is a trend-following or lagging indicator because it is based on past prices. The two
basic and commonly used MAs are the simple moving average (SMA), which is the simple
average of a security over a defined number of time periods, and the exponential moving
average (EMA), which gives bigger weight to more recent prices. The most common
applications of MAs are to identify the trend direction and to determine support and
resistance levels.

350
300
250
Close Price ( Unit Currency )

200
150

Simple Moving Average (10

day)

100
50
1
13
25
37
49
61
73
85
97
109
121
133
145
157
169
181
193
205
217
229
241

27

350
300
250
Close Price ( Unit Currency )

200
150

Simple Moving Average (20

day)

100
50
1
13
25
37
49
61
73
85
97
109
121
133
145
157
169
181
193
205
217
229
241

350
300
250

Close Price ( Unit Currency )

200
150

Simple Moving Average (50

day)

100

Simple Moving Average (100

day)

50

1
13
25
37
49
61
73
85
97
109
121
133
145
157
169
181
193
205
217
229
241

28

350
300

Close Price ( Unit Currency )

250
200

Simple Moving Average (10

day)

150

Simple Moving Average (20

day)

100

Exponential Moving Average

(10 day)

50

Exponential Moving Average

(20 day)
1
13
25
37
49
61
73
85
97
109
121
133
145
157
169
181
193
205
217
229
241

350
300
250
Close Price ( Unit Currency )

200
150

Linear Weighted Moving

Average (5 day)

100
50
1
13
25
37
49
61
73
85
97
109
121
133
145
157
169
181
193
205
217
229
241

Relative Strength Index ( RSI )

The relative strength index (RSI) is a momentum indicator developed by noted technical
analyst Welles Wilder, that compares the magnitude of recent gains and losses over a
specified time period to measure speed and change of price movements of a security. It is
primarily used to attempt to identify overbought or oversold conditions in the trading of an
asset.

29

19 day RSI
90
80
70
Axis Title

60
50
40
30
20
10
1
9
17
25
33
41
49
57
65
73
81
89
97
105
113
121
129
137
145
153
161
169
177
185
193
201
209
217
225
233
241

Candlestick Charts
70000000.00

350

60000000.00

300

50000000.00

250

40000000.00

200

30000000.00

150

Total Traded Quantity

Open Price
High Price
Low Price
20000000.00

100

10000000.00

50
0
1
14
27
40
53
66
79
92
105
118
131
144
157
170
183
196
209
222
235

0.00

Close Price

MACD
Moving average convergence divergence (MACD) is a trend-following momentum indicator
that shows the relationship between two moving averages of prices. The MACD is calculated
by subtracting the 26-dayexponential moving average (EMA) from the 12-day EMA. A nineday EMA of the MACD, called the "signal line", is then plotted on top of the MACD,
functioning as a trigger for buy and sell signals.
MACD = EMA(26 day) -EMA (12 day)

30

MACD
15.00
10.00
5.00

1
8
15
22
29
36
43
50
57
64
71
78
85
92
99
106
113
120
127
134
141
148
155
162
169
176
183
190
197
204
211
218

0.00
-5.00
-10.00

Recommendations:
Recommendations after analyzing valuation of stock

o
o
o

From FCFE valuation model the ICICI stock comes out to be undervalued as current
market price is 248 INR while intrinsic value of stock is 260 INR.
Hence it is recommended to buy the stock.
Aforementioned recommendation is further approved by the relative analysis where
stock is found out to be undervalued comparative to industry average.

Recommendations after technical analysis

o
o
o
o

From the graphs, we can see that the stock prices were in a downward trend with minor
ups and down for the past year as per the moving average curves.
We can conclude that owing to the cyclical nature of the stock prices they are a good
option to be bought at this stage for long term buyers.
For short term buyers, it is not a recommended option.
Value unlocking in subsidiaries and recovery in the core business are key factors that
will drive stocks from the current levels for ICICI bank.

Recommendations after analyzing financial ratios

o
o

Ratio analysis of financial statements of ICICI Bank Limited shows that banks current
ratio is better than the quick ratio.
ICICI Bank has invested more funds in current assets than the fixed assets and liquid
assets. Bank has given more advances to its customers and thus has less cash in hand.
Profitability ratio of the bank is lower than as compared to previous years.
It is an alarming situation for the bank since the operating profit growth and the net
profit growth are negative for the current year, and thus needs to take corrective
measures for the same.
It is recommended that the investor takes into consideration, all the above mentioned facts
before taking any investment decision.

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