Buy This Smallcap Banking Stock For 40% Returns In 1-Year On Solid Financials

The Sensex has fallen nearly 15% from 52-week highs. There are plenty of stocks that are now offering value, particularly stocks that have fallen sharply. Here is a banking stock that has the potential to give returns of 40% according to broking firm Anand Rathi.

Buy the shares of DCB Bank Ltd for a target price of Rs 115

The brokerage has a price target of Rs 115 on the stock of DCB Bank Ltd, as against the current market price of Rs 82.

According to it, higher margins and moderating credit cost led to a strong increase in profitability for DCB, with RoA at 1.1%." Higher slippages kept asset quality under pressure. Key positives for the quarter were 1) collection efficiency near pre-Covid levels, 2) strong recoveries/upgrades, 3) decline in stress across core segments, 4) strong traction in retail deposits and 5) strong pick-up in disbursements in its core mortgage book. With credit growth expected to pick up and normalising credit costs, earnings would improve. We maintain our Buy rating on the shares, with a target price of Rs 110, valuing the stock at 0.7x P/ABV on the FY24e book," Anand Rathi has said.

Slippages to ease for DCB Bank Ltd ahead

Slippage for the quarter were a high Rs 3.8 billion (5.5% of loans), 18% lower than the previous quarter. Recoveries/upgrades were strong, reflecting the bank's collection efforts. Collection efficiency (NPA and the restructured pool) of the key portfolio (details in Fig. 7) has been steadily improving. The net standard restructured book was Rs18.7bn (6.4% of loans). With improvement in business activities and collections at various segments, slippages are expected to moderate in a couple of quarters.

FY23 RoA to be 1%. With a pick-up in business growth and normalised slippages from FY23, credit cost should soften from current levels. Higher business growth combined with lower credit cost would lead to a sharp pick-up in earnings from current levels. We estimate a 1% RoA in FY23.

Valuation of DCB Bank Ltd

Valuation of DCB Bank Ltd

Anand Rathi says that the May'23 target of Rs 115 is based on the two-stage DDM model. This implies a 0.7x P/ABV multiple on its FY24e book.

The brokerage has also highlighted some of the risks or the stock of less-than-expected loan-book growth; large slippages from the mortgage book. For the last few days, markets have also been immensely volatile, which has thrown up buying opportunities in several shares.

The financial performance of DCB Bank, including slippages and margins are improving, 2 of the prime reasons to buy the shares of the bank. It is a good stock to buy now, for a 1-year returns of nearly 30% from the current levels.

Over the years, the bank has managed a rapid expansion and now has 400 branches. The shares of DCB Bank hit a 52-week high of Rs 114. To buy the shares today, you will have to pay a price of Rs 82.

Disclaimer

Investing in stocks poses a risk of financial losses. Investors must invest with caution and understand the nature of risk. Buy only if you have an appetite for risk. Neither Greynium Information Technologies Pvt ltd, nor the author should be accountable for losses incurred based on a decision of the article. The contents are sourced from the brokerage report of Anand rathi.