Buy DCB Bank Ltd For Target Rs.144 - HDFC Securities
DCB Bank has managed to maintain healthy capitalisation, sustainable and calibrated growth in advances with continued focus on the SME segment, competitive NIMs, comfortable asset quality with stable management team. The company has strong capital adequacy, a comfortable liquidity position, a resilient operating model and increasing retail mix. The bank has created niche in mortgage financing (~40% of total advances) with emphasis on small ticket loans (ticket size ~3-3.5mn) to self-employed in Tier II-VI cities. The portfolio is well diversified with greater reliance on secured lending (~96% of the total loans are secured). Retail focus will help the Bank to deliver double digit growth in loan book from next fiscal.
Over the years, the bank has gained expertise in the high yielding self-employed small ticket loan segment and has managed to deliver loan book growth with limited incremental slippages. The management has reiterated focus on increasing the share of retail deposits, especially retail term deposits, and improving the granularity of deposits. The Bank’s intention to focus on Business Loans (LAP), Home Loans, Gold Loans, KCC (Kissan Credit Card), Tractor Loans and short term Corporate Loans is in the right direction to improve loan book. Higher credit growth, marginal compression in margins, sharp improvement in operating efficiency and contained credit cost will help in improvement of return ratios.
Valuations and Recommendations:
DCB Bank’s ability to improve its cost of funds vis-à-vis its peers, further reduce the asset-liability gaps in the near-term buckets and maintain the asset quality will remain key driver. The bank is well capitalised (CAR 18.28% and Tier I 14.2%) and has the ability to raise funds well ahead of requirement. It has strong support from its promoter AKFED which has infused capital in the past either directly or through associated entities. Focus on Tier-2 to Tier-6 locations would support growth as competition is lesser in these locations and increase granularity of loan book. Amid the current economic environment and subdued lending in a stressed scenario of higher slippages, the bank’s capital position and solvency metrics is likely to remain comfortable.
DCB Bank’s key strength lies in robust assets side of the business; the bank has been able to gain credit market share with stable credit quality. Though we remain optimistic on its retail focus and the segment is caters to; we are cautious on growth stance given moderate
CASA ratio and credit pressure in mortgage, SME and corporate loan book. Though DCB Bank has concerns like weak fee, high cost structure & sub-optimal return metrics, a pro-active management & cheap valuations offer attractive risk reward profile. We think the base case fair value of the stock is Rs.132.5 (1.15xFY22E ABV) and the bull case fair value is Rs.144 (1.25xFY22E ABV) over the next two quarters. Investors can buy the stock at LTP and add on dips to Rs.105-107 band (0.92xFY22E ABV). At the LTP of Rs.116.8 it quotes at 1.01xFY22E ABV.
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