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Asset quality issue, a thing of the past

Bank of Maharashtra (BOM) is a PSU which is currently 90% owned by government. In the recent past, BOM had to undertake several course corrections in its lending strategy as it navigated multiple disruptions (such as demonetization, GST, IL&FS crisis & now Covid) which were hurdles to growth and asset quality. However, we believe that BOM has finally found the right lending mix with 60% of its book targeted towards Rural, Agriculture and MSME, while the remaining 40% goes to corporates (mostly CPSEs).

(mostly CPSEs). We believe that the focussed lending on retail, especially towards housing, should help BOM regain its growth trajectory without compromising on asset quality. BOM is also working on digitizing its banking operations, which will help overcome the challenges of scalability and aid in lowering costsin the long run. We initiate coverage with a BUY for a price target of INR 25.0 (0.9x FY25 P/ adj book) which represents a 47.1% upside from the CMP of INR 17.0 over the next 24 months. We believe that the market currently is not factoring in:

* 14.1% CAGR growth in gross advances over FY22-25E.

*  Balance sheet clean-up through complete provisioning for the legacy impairment.

* Expected improvement in return ratios- RoAA to 0.8% (+25bps) & RoAE to 13.7% (+502bps) by FY25.

* By FY25, we expect cost to income to moderate at 45.3% as adoption of digital banking solutions starts paying off.

At the current valuation of 0.6x FY25 P/adj book, BOM quotes at a significant discount given growth expectations. The paring of promoter stake from >90% currently to 75%, as required by SEBI listing norms, is an overhang on the stock price.

Our Bull and Bear Case Scenarios

We have prepared a Bull and Bear case scenario, with 3 variable sensitivity, based on FY24 gross advances, NIM margins & target PB

* Bull Case: We have assumed FY25 net advances of INR 2,10,000.0 cr in FY25 (CAGR of 17.0% over FY22-25) and NIM margins of ~4.0% (+101bps over FY22), which will result in a Bull Case price target of INR 31.1 per share (upside of 82.9% from CMP). We assign an FY25 target P/(adj BV) of 1.1x

* Bear Case: We have assumed FY25 net advances of INR 1,80,000.0 cr in FY25 (CAGR of 11.1%) and NIM margins of ~2.8% (-22bps over FY22), which will result in a Bear Case price target of INR 16.7 per share (downside of 1.8% from CMP). We assign an FY25 target P/(adj BV) of 0.7x

Investment triggers

* Legacy issue now behind: With most of the NPAs provided for and aggressive credit monitoring and NPA recognition policies in place, we believe that the historical NPA crisis should not be repeated.

* High provisioning provides damage control to P&L: BOM already has high PCR which should provide a cushion to P&L going forward. Further, the management expects provision reversals of at least INR 1,000 cr per annum for the next 2-3 years.

Catalysts

* Faster growth in AUM: Faster rise in AUM can lead to significant re-rating of the stock and hence leaves a potential upside risk.

* Benefits from Digital Strategy: Despite banking being a high touch business, BOM’s digital strategy should help in aggressive scale up and data enabled decision making to improve quality of credit underwriting and control.

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