PNB Gilts: Taking the lead

Score:Average

Sanjiv Shankaran

GIVEN the company's financial track record, the advantage of being among the first to enter the business and in a strong position to anticipate interest rate changes, investors may consider subscribing to the IPO of PNB Gilts.

PNB Gilts is to shortly approach the market with a public issue of 3.5 crore equity shares at Rs. 30 per share. The issue aims to raise Rs. 105 crores.

PNB Gilts, a primary dealer in the government securities market, was promoted by Punjab National Bank in 1996. The primary objective behind the public issue is to augment the company's own capital to increase the level of its activity in the government securities market.

Investors may consider subscribing to the issue for the following reasons:

Primary dealers generally provide two-way quotes in the secondary market for government securities and also participate in the primary market by underwriting a portion of the issue. PNB Gilts' current business activities largely revolve around government securities.

Interest on government securities and profit on the sale of the same has comprised the most significant portion of the income over the last couple of years. For the 10 months ended January 2000, interest income contributed Rs. 116 crores (57 per cent) while profit on the sale of the same contributed Rs. 54 crores (26 per cent). On the expenditure side, interest expense makes up for well over 90 per cent of the total expenditure.

The company's profitability of operations has been high. The operating profit margin was around 48 per cent in 2000 while the return on net worth (the measure of return on an equity shareholder's funds) was around 32 per cent over the last two years.

Most of PNB Gilts' capital is invested in its stock-in-trade such as securities. Therefore, the company's fortunes will primarily depend on the change in interest rate and the way the company deals with it.

Currently, the company has no non-performing assets (NPAs) -- a huge problem dogging many financial intermediaries. But the danger for a primary dealer such as PNB Gilts is that any sudden change in interest rate or wrong forecasts may result in the company having to make significant provisioning following a sharp fall in the price of securities that it holds as inventory.

Key employees in PNB Gilts are deputed from the promoting bank. The vast experience of banks in the debt market in conjunction with PNB Gilts' own experience as a primary dealer puts the company in a relatively better position to anticipate interest rate changes.

The advent of competition may adversely impact the earnings of PNB Gilts, as also other primary dealers, in the near future. Last year, new players were allowed to take up primary dealership. As in other fields, the advent of competition may lead to a decline in underwriting commission and a narrower spread while offering two-way quotes.

PNB Gilts is the first primary dealer to come up with a primary issue, thereby making comparisons with other financial intermediaries irrelevant. The offer price -- Rs. 30 -- is at a price earnings multiple of about 4.7 times the projected 2000-2001 earnings per share (EPS) of 6.37.

Industry type :Financial intermediary

Issue type :Equity shares

Issue size and rate :35 crore equity shares at Rs. 30 each

Issue opens on :July 11

Issue closes on :July 18

Lead manager :JM Morgan Stanley

Listing at :DSE, NSE and BSE