Development Credit Bank-Buy DCB; target Rs 64: Unicon Investment

Unicon Investment is bullish on Development Credit Bank (DCB) and has recommended buy rating on the stock with a target price of Rs 64 in its September 24, 2011 research report.

“Development Credit Bank (DCB) is a small new generation private sector bank serving ~6 lakh customers with a network of 82 branches and 140 ATMs as of June 11. Its branches are concentrated in western India with 65% of branches located in Maharashtra, Gujarat and Goa. After strategic overhaul in FY09, bank has returned to profitability of INR 214 mn in FY11 from a loss of INR 785 mn in FY10. This remarkable growth was achieved with limited number of branches. Going ahead, on back of branch expansion and strong business growth of ~15% CAGR during FY11-13E, we expect bank to continue its profitability run. The growth seems to be achievable due to diversified loan book, efficient retail deposits, reduction in overall costs. With restructuring of balance-sheet largely in place, we expect a revival in business growth of 15% CAGR over FY11-13E. This will be achieved with management giving greater focus on diversification of its advances with secured retail book. In addition to a larger share of retail deposits (>70% CASA+term) in total deposits on liability front. Hence, NIMs to move to 3.3% in FY13E from 3.1% in FY11, is likely to be led by a better cost of deposits (higher CASA ratio) & focus on high yielding MSME sector in loan portfolio.”

“With limited number of branches (80) management was able to bring back the bank to profitability (INR 214 Mn) & improved its CASA ratio (35%) in FY11. In 2011, DCB has received 10 branch licenses approval from RBI, which we believe to support DCB’s business growth going ahead. The expansion of branch network is likely to improve deposit growth by 15% CAGR in FY11-13E and with banks focus on CASA - CASA ratio to improve to 36.46% by FY13E. With revival in business, DCB's profit is expected to increase by ~57% CAGR during FY11-13E. This will be led by healthy topline growth driven by bank's focus on MSME, reduction in interest costs, improvement in non interest income (focus on increasing fee & trading income). Further bank is also keeping operating expenses in check (~10% CAGR over FY11-13E). We estimate cost-to-income to decline to 61% by FY13E from 71% in FY11, thereby improving profitability. There has been a tremendous improvement in DCB's asset quality over the past five quarters, driven by significant reduction in slippages and substantial recoveries/upgradations. With restructuring coming to an end & 90% of total loan book is secured NPA risk has ebb sharply. GNPA is expected to decline further with minimal incremental slippages, healthy recoveries and secured loan growth. As a result, credit cost is estimated to dip sharply. With Tier-1 capital at 11.1%, DCB seems adequately capitalized for medium-term growth.”

“The stock historically traded at higher than 4x its one year forward ABV till Jan 08, slid to 2.5x in mid FY09 and crashed to sub 1.5x in Q4FY09. With revamping of business & returning to profitability, we expect the stock to command higher multiple going forward. At the CMP stock trades at 1.3x & 1.2x FY12E & FY13E adjusted book value (ABV) respectively. We expect return ratios to improve from hereon for the bank i.e. RoE to reach to 9.5% in FY13E from 3.5% in FY11. Thus, we value the bank's business at 1.7x FY13E P/ABV, thereby evaluating it at INR 64. Buy DCB with a price recommendation of INR 64, an upside of 40% from the current market price.” says Unicon Investment research report.