Banking Stock Is Darling of Tata Small Cap Mutual Fund With Potential Upside of 121%: Buy?

DCB Bank has a market valuation of Rs 3,496.81 Cr, making it a small-cap firm. The bank's shares have fallen 13% year to date, but Keynote Capitals, a brokerage company, believes that the stock has a lot of potential since management anticipates a robust rebound and improvements that will enhance the bank's asset quality and slippage ratio. In the following two to three years, management aims to reach a ROA of above one per cent and lower the cost-to-income ratio to 55%. The DCB Bank stock ended at Rs. 112.10 on Friday, but Keynote Capitals has set a target price of Rs. 250, suggesting a potential 121% rise in its value.

"DCB Bank Ltd(DCB) reported a strong loan book growth of 5% on QoQ and 19% on a YoY basis during the quarter, with the mortgage and AIB segment contributing 44% and 24% of the loan book, demonstrating substantial growth of 4%/6% on a QoQ and 24%/30% on a YoY basis, respectively. NII grew by 16% on a YoY basis. However, NIM contracted by 19bps on a YoY basis due to the increased cost of funds. The Bank's cost-to-income ratio had remained elevated at ~64% during the quarter due to its ongoing expansion of its branch network and continuous increase in employees."

"During the quarter, slippages were increased due to loans coming out of the moratorium from the restructured portfolio. However, net slippages remained low due to strong recoveries and upgrades. Going forward, management expects strong recovery and upgrades to continue, which will improve the slippage ratio and asset quality for the Bank. Management aims to reduce the cost-to-income ratio to 55% and achieve an ROA of >1% in the next two to three years," Keynote Capitals stated in a note.

Commenting on the view and valuation of DCB Bank, the brokerage said, "We have revised our estimates and maintained our view on DCB Bank Ltd with a BUY rating and a target price of Rs.250 (1.2xFY26Adj.BookValue). We believe that DCB is set to grow its loan book at 20-22% with a stable NIM of 3.70-3.75%. Improvement in the cost-to-income ratio and provision will lead to the normalization of asset quality. All these factors will lead to profitability growth and enhance its return ratios."

The bank anticipates a significant increase in disbursements in the upcoming quarters and continues to follow its forecast of doubling the loan book in three to five years. The management anticipates that NIM will be between 3.65% and 3.75% in FY24, and that the cost-to-average-assets ratio will continue to decline as the bank grows its loan book and improves productivity.

As per the shareholding pattern of DCB Bank for July to September 2023 quarter, Invesco India Multicap Fund held 33,61,121 shares or 1.08% stake, LIC MF Large & Mid Cap Fund held, 43,14,061 shares or 1.38% stake, Canara Robeco Mutual Fund A/C Canara Robeco Small Cap Fund held 71,12,169 shares or 2.28% stake, ICICI Prudential Smallcap Fund held 75,68,864 shares or 2.43% stake, Franklin India Smaller Companies Fund held 1,04,49,095 shares or 3.35% stake, DSP Small Cap Fund held 1,31,58,269 shares or 4.22% stake, HDFC Small Cap Fund held 1,39,48,722 shares or 4.47% stake and Tata Mutual Fund - Tata Small Cap Fund held 1,62,14,140 shares or 5.20% stake in the company.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.