Standard Chartered Bank INDIAN DEPOSITORY RECEIPT…Looking Beyond the Financials…At the Exchange Risk Involved…What if the Rupee Appreciates !?

I’m Looking Beyond the Financials here…..at the Standard Chartered Bank (SCB) INDIAN DEPOSITORY RECEIPTS (IDRs) Issue….am not inclined to recommend Investment,although the Pricing looks reasonable and it will not form part of the Overseas Investment Annual Limit of US $ 200k per Indian Citizen….probably a contrarion here as all seem to be recommending the IDR….I’m a bit worried about the Exchange Rate Risk involved…in that the Rupee may appreciate and as the underlying SCB Share is quoted in Pence and HK $ it would impact the Rupee Quote on BSE and NSE….Is my thinking conceptually flawed on this risk ?…do let me know 

I’ll let the IDR List and take a call on it as a Secondary Market Investment

Standard Chartered Bank,that is the sponsor of the Mumbai Marathon since it’s inception a few years ago,has just launched INDIAN DEPOSITORY RECEIPTS (IDRs) in India

The IDR Issue Specifics

The IDRs have been priced in the range of Rs 100 to Rs 115 with 10 IDRs equivalent to one SCB Share of US $ 0.50 Face Value…240 Million IDRs are on offer,with QIB reservation at 50%,Non Institutional at 20% and Retail at 30%…The Issue Opened on May 25,2010 and shall close on May 28,2010

Issue Price Range is at Relatively Reasonable Valuations on both Earnings and Assets basis 

Assets Basis

At December 31,2009,SCB had a Consolidated Networth ,net of Minority Interests of US $ 27340 Million,with Equity at US $ 1013 Million ( FV US $ 0.50) and Reserves at US $ 26327 million…That’s US $ 13.50/share or Rs 635/share (US $=Rs 47)….With 10 IDRs=One Share,it translates to Issue Price of Rs 1050/share,assuming the Pricing is finalised at Rs 105….That’s a Price to BV of just 1.65….The Networth should move towards US  $ 31000 million at December 31,2010 with Profits net of dividend of @ US $ 3000 million and IDR Proceeds of @ US $ 536 million (assuming Rs 105 pricing and Exchange rate of Rs 47 to the Dollar)…Equity will move up marginally to US $ 1025 million.The Book Value/Share would be @ US $ 15/share or Rs 705…The FY 10 P/BV would then drop to 1.5….   This is a shade lower than even the 1.6 projected for FY 11 March ending for  ICICI Bank and State Bank of India…and significantly lower than the over 2 times projected for Axis bank,HDFC Bank and Yes Bank…It’s more on less equal to that projected for overseas Banks like Westpac and National Australian Bank in Australia and even those in Hong Kong ….so the IDR is not priced  high on Assets basis

Earnings Basis

in 2009 SCB earned a consolidated US $ 3892 million  net of minority interest…That translates to Rs 18300 crs and an EPS of US $ 1.92 or Rs 90 based on 2025 million shares at December 31,2009…No of Shares will go up to 2049 million and Projected EPS would be US $ 2.10 or Rs 99…that’s a muiltiple of under 11 times at computed Share Price of Rs 1050,assuming IDR Price assumed Issue Price of Rs 105….This compares well with the higher earnings multiples afforded to the Banks named above

A word of caution…..

• As the IDR is not covered by the Securities Act ,Securities Transactions Tax will not be applicable on Trades….thus one  will not get the benefit of nil tax on Long term gains and lower tax rate on short term gains…Gains will be added to total taxable income and taxed on the applicable…for high earners the rate would cross 30% ….in any case the New Direct Taxes Code that is scheduled to be implemented from next year will provide a level playing field as it does away with STT and also any distinction between short term and long term gains….though there is hope that the Code is modified to revert to existing scenarios  
• As FIIs and Insurance Funds are not allowed to participate in the IDRs,the shareholder base would be missing these two significant categories…therefore interest even on listing could be muted
• There is no reverse fungibility…after a one year lock in, 10 IDRs can be converted to One SCB Share…but such a share can be held for a maximum of 30 days only and must be sold off and cannot be reconverted back to IDRs  
• As the IDR’s underlying is the SCB share,the Rupee quotes on BSE and NSE will reflect the quotes on London Stock Exchange which are in Pence and those on Hong Kong Stock Exchange which are in HK $…therefore Changes in Exchange Rates between the Pound and the HK $ on one side and the Rupee on the other will also impact the Rupee Quotes….and to make this even more complicated,the Face Value of the SCB Ordinary Share is designated in US $ at US $ 0.50 per share….With pan Asia Operations SCB took a US $ 2.8 Billion hit on FX Translations in 2008 and less in 2009…have a Look at the Exchange rate Impact on Indian Quotes….I’m not even considering the impact of Earnings and Multiples