E What Is Your Take On ICICI Bank?

Five years ago, ICICI Bank closed at Rs 213.11. It recently traded at Rs 232.80. It’s barely judged in five years. In the mean-time earnings have grown from Rs 10.65 in the year to 31^st March 2011, to an expected Rs 21.53 in the year to 31^st March 2016. Thus while the company appears to have delivered, the market has not. Why?

Numbers don’t tell you what to do. But they do guide you towards doing additional research to help you decide what you ought to do. ICICI Bank will be reporting results on 28^th January, 2016. India’s corporate balance sheets are stretched, and there is much fear in markets on account of rising non-performing assets. And this long known issue has influenced prices: particularly of big corporate lenders like ICICI Bank. I’ll leave you to determine whether the risk is reflected in the price, or whether there is more pain to come.

Here are some interesting data points:

Valuation

Over the past decade, ICICI Bank has traded at a median trailing twelve month multiple of 17.08 (average 17.91) with a standard deviation of 6.14. The stock recently traded at Rs 232.80, which represents a multiple of 10.87. This level is just over one standard deviation below decade average levels. Assuming normalcy in the distribution over the long-term, this suggests that probability of a further contraction in the multiple is limited to below 12.58%. A reversion to decade median levels would take price up to Rs 365 (57% implied upside): at this level the stock can be viewed in a historic context as neither expensive nor cheap.

Over the past decade, the Sensex has traded at a median trailing twelve month multiple of 16.47 (average 17.03). ICICI Bank has traded at a relative PE of 1 at median levels (average 1.04) over the past decade. Recently, the Sensex traded at a multiple of 17.43, compared with 10.87 for ICICI Bank. If ICICI Bank were trading at a historically consistent relative PE, the stock would be priced at closer to Rs 371 (59% implied upside).

Over the past decade, ICICI Bank has traded at a median price to book multiple of 1.76 (average 1.92) with a standard deviation of 0.40. The stock recently traded at Rs 232.80, which represents a multiple of 1.56. This level is just below one standard deviation below decade average levels. Assuming normalcy in the distribution over the long-term, this suggests that probability of a further contraction in the multiple is limited to below 18.82%. A reversion to decade median levels would take price up to Rs 262 (13% implied upside): at this level the stock can be viewed in a historic context as neither expensive nor cheap.