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  

IMPACT OF CHANGES IN THE EXCHANGE RATE  ON RUPEE QUOTES OF THE IDR

 

London Stock Exchange Quote in Pence

 

52 Week High/Low is 1848/1115

 

Hong Kong Stock Exchange Quote in HK $

 

52 Week High/Low is 219/141

 

Exchange Rate

 

£ = Rs

 

Now

 

 

1673

 

 

Projected

High

 

1900

 

Projected

Low

 

1200

 

Exchange Rate

 

HK $ = Rs

 

Now

 

 

184

 

Projected

High

 

220

 

Projected

Low

 

140

 

Current

 

£ = Rs 68

 

 

 

114

 

 

129

 

 

81

 

Current

 

HK $ = Rs 6

 

 

110

 

 

132

 

 

84

 

If Rupee Appreciates by 10%

 

£ = Rs 61

 

 

 

 

 

102

 

 

 

 

116

 

 

 

 

73

 

If Rupee Appreciates by 10%

 

HK $= Rs 5.40

 

 

 

 

99

 

 

 

 

119

 

 

 

 

76

 

If Rupee Depreciates by 10%

 

£ = Rs 75

 

 

 

 

 

125

 

 

 

 

 

143

 

 

 

 

 

90

 

If Rupee Depreciates by 10%

 

HK$=Rs 6.60

 

 

 

 

 

121

 

 

 

 

 

145

 

 

 

 

 

92

 

 

 

An Amusing Observation from their Website

Standard Chartered Bank has a new Brand Promise‘Here for Good’

It encompasses ‘Here for people’…’Here for progress’….’Here for the long run’

…and we have it’s Head in India,the Burly Bindra making sweet noise on this new promise

BUT have a look at their Homepage on their website

 http://www.standardchartered.com/here-for-good/en/hereforgood_noflash.html 

Move the cursor over their Logo….These are the Countries that will come up in their ‘Here for the long run’….in this sequence from top to bottom

‘Here for the long run in Taiwan’

 ‘Here for the long run in Korea’

‘Here for the long run in Indonesia’

‘Here for the long run in China’

‘Here for the long run in Pakistan’

‘Here for the long run in Hong Kong’

‘Here for the long run in Singapore’

‘Here for the long run in Thailand’

‘Here for the long run in Bahrain’

‘Here for the long run in Malaysia’

AH ! NO MENTION OF INDIA !…except for ‘expanding microfinance in India’….and India was the first country to notch a Billion Dollars in Profits in 2008…it repeated this in 2009 but was just pipped by Hong Kong…Both contribute 21% each to the Bank’s Consolidated Profits….Perhaps an oversight….but perhaps reveals a ‘take for granted’ mindset towards India…and I’m not at all insecure when stating this !…I see this mindset across the globe as India and Indians begin to assert themselves

A Recent SCB Mauritius Investment that raised an eyebrow and begs for a clear explanation

Also last month a FII,Standard Chartered Bank ( Mauritius) invested heavily in the IPO of Shree Ganesh Jewellery at Rs 260 and on the first day of listing sold all their holdings at a heavy loss at Rs 169…I had blogged on this suspicious investment 

Interesting and Amusing….Shree Ganesh Jewellery House Ltd prices it’s IPO at Rs 260…lists much lower on April 9,2010 and closes at Rs 163…and on this first day itself Standard Chartered Bank (Mauritius) Limited A/c Emerging India Fund sells at a huge loss,over half a million shares in a Bulk Deal at Rs 169.23 ! 

The SCB IDR Issue Closes tomorrow…and it’s received a lukewarm retail response,despite shares being offered to them at a 5% discount…Anchor Institutional  Investors have been allotted shares at Rs 104

Interesting IDR Listing ahead in June 2010 on BSE and NSE

Cheers !

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