Fresh investments with a two-three year horizon can be considered in the Indian Depository Receipts (IDRs) of Standard Chartered PLC.

Standard Chartered PLC is a holding company which operates 1,700 branches in 70 countries through various subsidiaries. Majority of the income of Standard Chartered PLC is derived from Asia, Africa and West Asia. For 2011, only 10 per cent of the income was generated from the troubled UK, Europe and Americas.

Following the recent Budget announcement allowing two-way fungibility in IDRs, the Standard Chartered IDR has turned attractive. Fungibility allows an investor to trade freely between the two exchanges on which a stock is listed. This allows them to take advantage of any disparity in price between the two locations.

Today, the Standard Chartered IDR trades at a 25 per cent discount to the stock price in London. .

The stock trades at Rs.1270 in London. The IDR in India trades at Rs.95. Given that 10 IDRs equal one share, there is a 25 per cent gap in price.

This gap offers good upside potential. Prior to SEBI restricting IDR's convertibility in June 2011, the Standard Chartered IDR was trading at an average 8 per cent discount to the underlying share in the UK.

The stock also provides a good diversification opportunity for those who hold Indian bank stocks. The business prospects of Standard Chartered remain strong. At its current price (Rs 95), the price-to-adjusted book value of the IDR works out to 1.37 times, a discount to most new private banks in India. The price-to-earnings multiple is at an attractive 9.4 times.

While Standard Chartered PLC has lower return on equity than Indian private banking peers, its large balance-sheet with strong fee income contribution, and diversified income stream make the stock a good long-term investment.

Good capital adequacy ratio (17.6 per cent), high proportion of low-cost deposits, and access to cheaper sources of funds, thanks to superior credit rating (AA-), are other positives.

The dividend yield on the IDR is 4.1 per cent (however the dividend is taxed at marginal tax rate). Also, unlike local shares, long-term capital gain on sale of IDR would be taxed.

Diversified business

. The total assets of the Standard Chartered PLC have grown by 12.6 per cent compounded annually during 2007-2011 and profit at an annualised rate of around 11.2 per cent in this period.

The company's business is diversified across geographies and business segments. No country contributes more than 17 per cent to the total income and no business segment accounts for more than 14 per cent. Fee income which needs lower capital, accounts for 42.5 per cent of the total income.

Diversity in business cushioned the company's profits even as the earnings from its key geographies — India and Korea — declined during 2011. Similarly, the consumer banking business, whose profits declined during 2009, recovered and aided profit growth during 2010 and 2011 when wholesale banking's profit growth moderated.

Rise in interest rates, subdued capital market activity, shrinking margins and rupee depreciation took a toll on Standard Chartered PLC's India business. The income fell by 11 per cent while the operating profits declined by 33 per cent. The company has acquired other businesses to expand in Asia.

Acquisitions have helped the company strengthen its presence in Korea, Taiwan, Thailand, Pakistan and India. Recent buyouts include GE Capital's consumer finance business in Hong Kong and Singapore and GE Money's (Singapore) auto and personal loan business.

Standard Chartered PLC's net profits for the year ended December 2011 grew by 12 per cent to $4.74 billionor Rs 26,278 crore.

Growth prospects

The growth prospects of Standard Chartered PLC appear bright, notwithstanding regulatory tightening across various markets. It has already met some of the regulations stipulated by Basel III and has strong capital position.

The markets in which it has a presence are expected to sustain healthy economic growth. According to IMF estimates, developing Asia (includes India, China, ASEAN) is expected to deliver GDP growth of 8.4 per cent over the next five years, while newly industrialised Asia (includes Hong Kong, Singapore and Korea) may deliver 4.4 per cent and West Asia and Africa 5 per cent.

Monetary easing and pick up in investment activity in countries such as India will help Standard Chartered's business.

Currency fluctuation

An appreciating rupee does pose a risk as it may depress the value of the IDR. However, this appreciation may also bolster the company's earnings from India.

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