Leading brokerage firm Kotak Securities in its recent report has placed an "Add" call on Bandhan Bank with a target price of Rs 280 per share. The brokerage sees a potential upside of 17% from its current level considering the given target price.
Bandhan Bank is an Indian commercial bank that focuses on underbanked and underpenetrated sectors. The company has a PAN-India presence and provides a diverse range of banking products and services, as well as asset and liability products and services, for micro and general banking. Bandhan Bank is a mid-cap bank with a market capitalisation of Rs 38,674.98 crore.
Stock Outlook & Returns
The Current Market Price (CMP) of Bandhan Bank stood at Rs 240.10 apiece on NSE, up 1.95% from its previous close. Its 52-week low is Rs 209.55 recorded on 22 November 2022, and the 52-week high is Rs 349.55 recorded on 22 May 2022, respectively.
The stock in the past 1 week has surged 9.56%, whereas, in the past 1 month it fell by 3.22%, respectively. Over the past 1 year, it fell 13.88%. However, in 3 years, it fell by 57.76%. Since its listing on 27 March 3018, it has fallen 49.65%.
A persistently higher NPL in the MFI book dominated discussions
Despite having presentations from all the business heads, the key discussion was on MFI. Management indicated that slippages would be elevated (~5% of MFI book) and provisions would be high (~2% of loans) in 2HFY23. The bank has tightened underwriting standards as it believes that the flexibility offered during Covid should not result in a permanent change in repayment behavior. However, a confluence of factors, including issues in Assam, Covid as well as the floods, seems to have resulted in a situation where the delinquency has been high. The performance of the book has been below expectations. While management has continued to defend its model, it is harder to explain this divergence when compared to its peers. Delayed payment from the Assam government, uncertain timelines of repayment from CGFMU (Credit Guarantee Fund for Micro Units) and a much slower recovery are adding to this discomfort.
Lot more focus on diversification of the book
Conversation with various business heads highlighted the efforts taken to diversify the loan book. Diversification is led by stronger loan growth in secured products over unsecured products. This includes growing housing finance, mid-corporate, SME loans and secured retail loans. While some parts of the portfolio have been tested against the Covid-related slowdown, it is still in the nascent stages of growth. We would need one more slowdown to understand the strength of the bank's underwriting standards. Management believes that the efforts to diversify have accelerated after Covid, as the volatility in the traditional MFI business, despite its strong potential to grow, is challenging to build comfort.
Maintain ADD: Known uncertainty but uncertainty timelines on recovery
Kotak Securities said, "We maintain ADD with a revised FV of Rs280 (Rs300 earlier). At our Fair Value, we are valuing the bank at 1.6X book and 8X FY2024E EPS for RoEs remaining healthy at ~20% as it recovers from the current Covid cycle. We acknowledge that our positive stance on the stock is getting tested given the delay in recovery, but we believe that there is a strong visibility of improvement in the underlying macro conditions for the bank's target segment. Hence, we would prefer to have this stance rather than wait until the headline print reports this improvement."
The stock has been picked from the brokerage report of Kotak 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 making any investment decision.