ICICI Has All the Right Moves

I am asked almost daily whether it's time to buy the Indian ADRs. The answer I often give is that if our markets have bottomed, it's the buying opportunity of a lifetime. However, no one can predict whether the bottom is in -- although many have repeatedly tried and failed -- so the best approach at the moment is to stay away or start nibbling in very small increments.

I have been buying aggressively in India and was a heavy buyer on Oct. 24, when the market collapsed and broke down to around 8,500 on the Sensex. Having said that, I have left plenty of powder dry to take advantage of further panic-selling that's sure to come, both here and in India.

I have stayed away from the Indian IT names both here and in India due to the massive uncertainty around that sector given the turmoil in the finance and insurance verticals, which are the biggest sources of revenue of the Indian IT sector.

One name that I have been buying in India is ICICI Bank (IBN - commentary - Cramer's Take), which I bought a slug of at INR 317 on Oct. 24. The shares closed yesterday in India at INR 434.35, down INR 37.5 in a big down day for the Sensex. So why ICICI, you ask? Let me count the reasons:

1. The stock trades at 0.6 time estimated fiscal 2010 (March 2010) book value.
2. The stock is currently valued at 9.8 times estimated earnings of INR 44.2 a share for the year ending March 2010.
3. ICICI shares are down 70% from highs set on Jan. 7, 2008.
4. The company is working rapidly to lower its operating expenses; this effort should lead to a marked improvement in its asset efficiency ratio going forward.
5. The bank is moving away from direct-selling agents to running its own branches, which will lead to significant improvement in profits. (Agency expenses dropped by 60% in the 2009 fiscal second quarter (September) year over year.)
6. The company is being cautious in its new hires and is focused on improving employee productivity, which should help improve the bottom line.
7. Wage inflation in India is moderating, which will help the bank's bottom line.
8. The bank is also reducing advertising expenses and sponsorships in a bid to improve earnings.
9. The bank has also slowed down lending in its retail vertical, especially in unsecured loans.
10. ICICI exited the small-ticket personal loan business a year ago due to rising delinquencies in that arena.
11. On two-wheeler loans, the bank has stopped allowing dealers to offer loans and instead moved the application process in-house to get a better handle on creditworthiness.
12. Finally, the bank has adopted stringent credit-screening processes across all segments ... for obvious reasons.

What about some of the overhang the bank is dealing with at the moment?

1. ICIC remains vulnerable to a deepening of the global financial crisis.
2. Retail delinquencies continue to rise.
3. Slowing economic growth is limiting leverage improvement despite the massive liquidity infusion by the government of India.
4. Capital market woes could affect revenue down the road.

I like the risk-reward profile in ICICI at present levels, especially because I have a two- or three-year investment horizon. Read this column, do your own research and see if you find the stock as compelling as I do at current levels.

Until the next time, happy investing!

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Know what you own: Somaney mentions Indian ADRs. Others include Infosys (INFY - commentary - Cramer's Take), Satyam Computer (SAY - commentary - Cramer's Take), HDFC Bank (HDB - commentary - Cramer's Take), Tata Motors (TTM - commentary - Cramer's Take), Sterlite Industries (SLT - commentary - Cramer's Take) and Wipro (WIT - commentary - Cramer's Take).

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At the time of publication, Somaney was long ICICI Bank in India, although positions may change at any time without notice.

Jay Somaney is a partner and fund manager with TSG Capital Partners, a hedge fund based in Plano, Texas, and founder of GlobalTechStocks.com, a subscription site that focuses on technology and Indian stocks (including ADRs), providing information, news and chatter. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Somaney appreciates your feedback; click here to send him an email.