Axis Securities Is Bullish On This Small-Cap Banking Stock, Suggest Buy For More Than 50% Gains

Axis Securities has recently published a report on DCB Bank, one of the private sector banks in India. In the report, the brokerage has suggested investors buy the stocks of the company for a target price of Rs 115/share. The brokerage is bullish on the DCB Bank and expects around 50% of gains in the next 12 to 18 months. DCB exited FY22 with a strong recovery pipeline and moderating slippages. This hints at a strong asset quality improvement going forward along with promising credit growth prospects.

CMP, Target Price, Returns & Performance, Potential Gains

The shares of the DCB Bank closed on Tuesday closed at Rs 76.20/share. It was opened at Rs 76.885/share. The Current Market Price (CMP) of the bank is just Rs 8.35 above the 52-week low of Rs 67.85/share level. While its 52-week high is Rs 113/share. The CMP is Rs 36.8 below its 52-week high. 

The share of the DCB Bank has fallen more than 20% in the last 1 year. It ahs gievn 10.35% negative retuns in last 1 month. However, in 3 months of investment, the share price moved up roughly 6.42%. Looking at the long-term investment returns, the stock has not performed well. In 3 & 5 years, the share price declined more than 60%. 

Potential Gains - According to the brokerage's estimated Target Price of Rs 115 & the CMP of the stock, the investors can expect more than 50% gains in 12 to 18 months. 

Financial Performance

The bank's focus on maintaining asset quality and improving collections along with its cautious approach to growth slowed down its disbursements, and consequently growth. However, with macros normalizing, DCB picked up momentum in terms of both advances and deposits. NII growth remained tepid at 6% YoY owing to higher slippages and excess liquidity weighing on yields. However, it was partially offset by a 46bps improvement in CoF owing to a benign interest rate environment. Thus, NIMs remained largely stable at 3.56% in FY22, which were further supported by higher recoveries in Q4FY22. While fee income growth remained healthy at 22% YoY, lower treasury income dented non-interest income which remained flattish YoY. Pick-up in the business activities and strengthening the collections team along with healthy Opex growth of 20% YoY resulted in the C-I Ratio inching up to 56% from 48.5% YoY. However, muted top-line growth coupled with elevated Opex and higher provisions for most of FY22 resulted in PAT de-growth of 14% YoY.  

Asset Quality

The COVID 2.0 disruptions added to the asset quality stress resulting in slippages from the already stressed asset pool. The restructured pool also inched up to 6.8% in Q2FY22 from 4.1% in FY21 despite DCB being selective in restructuring loans. However, the restructured pool is largely secured (~98+%) and collections have held up well so far. The pick-up in the economic activities improved collections. This coupled with better recoveries along with moderation in slippages resulted in the asset quality improvement. During the year, while slippages from the gold portfolio were higher, the bank remains confident of recovery in that portfolio by way of auction/sale of collateral, thereby easing the stress on the asset quality. Thus, despite multiple headwinds, GNPA remained at a manageable level of 4.3% vs. 4.1% in FY21.

Operational Review

Concentration ratios on both sides of the balance sheet continued to improve with Top-20 depositors improving to 6.3% from 7% in FY21, while Top-20 advances concentration remained flat at 5% YoY. Capital adequacy remains comfortable at 18.9% with Tier I capital at 15.8%. Risk-weighted assets stood at Rs 24,312 Cr (+5% YoY) and formed ~54% of total assets vs. 59% in FY21.

 

Key Competitive Strengths

1. Niche lender in serving the under-penetrated self-employed segment.
2. Largely secured small-ticket size book resulting in lower LGDs.
3. Pan-India presence enabling the bank to mitigate the risk of geographical concentration.
4. Granular book with one of the lowest advances and deposits concentration amongst peers.
5. Experienced and competent management team. 

Growth Drivers

1. Focus on the under-penetrated self-employed segment. 
2. Presence in key SME/MSME markets with huge growth potential.
3. Improving branch level productivity to support profitability.

Outlook & Valuation

Despite operating primarily in the self-employed segment, DCB has been able to manage the asset quality stress fairly well. The collections have held up well and with the trend likely to sustain, the secured nature of the bank's restructured book hints at credit costs moderating going forward. The positive trends in terms of a strong recovery pipeline and moderation in slippages will aid in asset quality improvement. With asset quality stress and credit costs having peaked out, the balance sheet growth and improving return ratios should drive valuations for DCB. At 0.5x FY24E ABV, valuations are undemanding. 

The brokerage said, "We retain our estimates and maintain our BUY recommendation on the stock with a target price of Rs 115/share, implying an upside of 54% from the CMP." 

Company Outlook-DCB Bank

DCB Bank is a new generation private sector bank with 400 branches across India. It is a scheduled commercial bank regulated by the RBI. It is professionally managed and governed. DCB Bank has contemporary technology and infrastructure including state-of-the-art internet banking for personal as well as business banking customers. DCB Bank has approximately 9,50,000 customers. DCB Bank has deep roots in India since its inception in the 1930s. Its promoter and promoter group the Aga Khan Fund for Economic Development (AKFED) & Platinum Jubilee Investments Ltd. holds below 15% stake. AKFED is an international development enterprise.

Disclaimer

The stock has been picked from the brokerage report of Axis Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.