Buy DCB Bank Ltd For Target Rs.140 by Axis Securities
Good Quarter; Pushing for Sustainable RoA of 1% from FY26!
Est. Vs. Actual for Q3FY25: NII – BEAT; PPOP – BEAT; PAT – BEAT
Changes in Estimates post Q3FY25
FY25E/FY26E/FY27E (in %): NII: 4.2/5.2/4.6; PPOP: 13.9/9.9/3.3; PAT: 12.1/7.4/-0.4
Recommendation Rationale
* Growth visibility healthy: In Q3FY25, one of DCB’s largest co-lending partners resumed the business origination driving healthy growth in the book. The bank has partnered with 6-7 colending partners and expects growth in the book across lending segments to remain healthy. Owing to the slowdown in microfinance, the demand for gold loans has improved, which is helping direct lending and co-lending. The management also indicated that the bank would continue to drive growth in the business loans. However, it would not shy away from pushing the growth pedal on Home Loans once clarity on PMAY guidelines emerges. The management indicated that the demand in the target customer segment continues to remain buoyant and expects a similar pace of growth to continue in the coming quarters. We expect DCB to report a strong advances growth of 20% CAGR over FY25-27E.
* NIM improvement remains the focus area: The key lever for margin improvement remains an uptick in yield on advances and investments and the bank’s ability to control CoF. While the yield on advances has slightly improved during the quarter, a portfolio shift toward betteryielding products would further aid yield improvement. However, the management would not look at pursuing growth, moving away from the risk and business strategy framework. DCB will look at aligning NII growth with balance sheet growth. While CoF is yet to peak out, we believe a favourable product mix should facilitate NIM improvement to ~3.5% (+/-5bps) over FY26-27E vs 3.4% in FY25.
* Focus on improving productivity to lower opex ratios: DCB’s C-I Ratio has, on average, ranged between 63-65% over the past 2 years. However, the bank is seeing productivity improve alongside cost control measures that have been undertaken and have been instrumental in arresting the pace of Opex growth. The management is optimistic about continued discipline on costs and aims to further improve the C-I Ratio to 60% in the near term. Currently, the C-A ratio is expected to settle at 2.55% vs 2.6%. Cost optimisation and Opex ratio improvement remain a key lever to help the bank achieve an RoA of 1%
Sector Outlook: Positive Company Outlook: With strong demand visibility in the target customer segment, DCB remains well-poised to drive healthy growth. The management intends to align deposit growth with credit growth while maintaining a steady C-D Ratio. We believe DCB is moving in the right direction in its journey to achieve an RoA of 1% by identifying NIM improvement levers, exercising stringent cost control and making efforts to improve productivity. No major asset quality challenges are visible; hence, slippages are expected to remain under control. Resultantly, credit costs are expected to range within the guided range of 45-55bps. Collectively, with these initiatives playing out, we expect DCB’s RoA to improve to ~1% by FY26-27E, with a RoA delivery of 13-14%.
Current Valuation: 0.7x Sep’26E ABV; Earlier Valuation: 0.7x Sep’26E ABV
Current TP: Rs 140/share; Earlier TP: Rs 135/share
Recommendation: We maintain our BUY recommendation on reasonable valuations.
Financial Performance:
* Operational Highlights: Disbursements grew by 10/1% YoY/QoQ. Advances growth was robust at 237% YoY/QoQ (Mortgages +21% YoY, AIB +21% YoY, Gold loans +35% YoY, while Corporate growth was muted, de-growing by 1% YoY). Deposits growth was equally healthy at 20/4% YoY/QoQ. Deposit growth was driven by both TDs (+22/5% YoY/QoQ) and CASA deposits (+16/2% YoY/QoQ). CASA Ratio stood at 25.1% vs 25.6% QoQ.
* Financial Performance: NII growth improved to 15/7% YoY owing to a 3bps QoQ NIM improvement. NIMs stood at 3.3% vs 3.27%. Yields improved by 6bps QoQ, while CoF increased by ~3bps QoQ. Non-interest income grew by 49% YoY and de-grew by 10% QoQ. Opex growth was contained and de-grew by 1% QoQ (up 18% YoY). C-I Ratio improved to 62.7% vs 64.3% QoQ. PPOP grew by 28/6% YoY/QoQ. Credit costs (calc.) stood at 58bps vs 42bps QoQ. Earnings grew by 20% YoY and de-grew by 3% QoQ. GNPA/NNPA improved to 3.11/1.18% vs 3.29/1.17% QoQ. PCR stood at 63%.
Outlook:
We factor in healthy growth momentum and NIM improvement, resulting in an upward revision of NII estimates by ~4-5% over FY25-27E. On expectations of cost control measures panning out and improving productivity alongside stable asset quality driving under-control credit costs, we raise our earnings estimates by 7-12% over FY25-26E while maintaining our FY27 estimates.
Valuation & Recommendation:
The stock currently trades at 0.6x Sep’26E ABV, and we value it at 0.7x Sep’26E ABV and arrive at a target price of Rs 140/share, implying an upside of 23% from the CMP. We maintain our BUY recommendation backed by reasonable valuations.
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