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Tamilnad Mercantile Bank Limited

Tamilnad Mercantile Bank ltd (TMBL), Incorporated in 1921, is a bank with strong presence in the state of Tamil Nadu with 369 branches, 949 ATM’s and 255 Cash recycler machines (CRM’s). TMBL’s business is majorly driven by lending to MSME’s customers along with Agriculture and Retail customers which combined contribute ~85% of total revenues. The bank reported deposits of ? 44,930 crore and advances of ? 33,490 crore as of March 2022. In fiscal 2022, TMB also reported a low credit cost ratio of 0.27%, along with that bank has also reported return on assets (ROA) of 1.66% and return on equity (ROE) of 16.58% which are better than the bank peers.

Positives: (a) Bank has reported strong growth in deposit and advances, from 2020- 22 bank has reported growth in deposit of 10.46% and growth in advance of 9.93%. b) Consistently growing customer deposit base with a focus on low-cost retail, current CASA ratio of 30.5%. (c) Bank consistently growing their customer base from 4.6 million customers in FY2020 to 5.08 in FY2022.

Investment concerns: (a) 70% of the loan book comes from MSME & Agricultural, in which credit risk is high. (b) Highly concentrated on one state that is Tamil Naidu, any natural calamity will impact the bank business adversely. (c) GNPA & NPA ratios have improved significantly in the last couple of years, any downturn in the economy will impact the bank.

Outlook & Valuation: In terms of valuations, the IPO is priced at price to book of 1.4 times and PE levels of 9.1 times at upper price band of the IPO. Company’s consolidated revenue growth of 5% over FY20-22 but interest/discount on advances was of 4.1% over FY20-22. It will be challenging for the bank to grow its business in Tamil Naidu as well as new geographics. Looking at the current valuation of price to book of 1.4 times we believe that near term positive has been priced in the ipo price. Thus, we have a NEUTRAL rating on the issue.

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