DCB Bank tanks over 30% in two days on downgrade by brokerages

The stock dipped 11% to Rs 94.75, extending its previous day's 20% dip on the BSE.

DCB Bank has dipped 11% to Rs 94.75, extending its previous day’s 20% dip on the BSE, after downgrade the stock with sell rating on concerns of aggressive expansion plan coupled with management comments of higher pressure on margins.

In response to increasing competition intensity from both new and existing players, DCB Bank has decided to almost double its branch network by December, 2016 – a major shift from previous guidance of 25-30 branches per year.

Considering expansion plans and strong growth, management may choose to raise capital over next 12-15 months, which will keep return on equity (ROE) at sub 10% for a prolong period.

“While strategy of aggressive expansion will have long term benefit, prolonged pressure on ROEs (less than cost of equity) is leading us to downgrade rating to SELL with target price of Rs 90,” said analysts at Motilal Oswal.

“Earlier the management had indicated to add 25-30 branches every year. Overall branches to rise over 300 by December 2016. We believe this will have a significant negative impact on the profit & loss of the bank, according to analyst at Anand Rathi Share and Stock Brokers.

Invest heavily in customer facing and frontline enabling technologies. This we believe, will further impact the cost to income ratio of the bank which is already amongst the highest in the industry, added analyst.

The stock hit a low of Rs 93 on BSE and has seen huge trading volumes. A combined 22.1 million shares representing nearly 8% of total equity of DCB Bank changed hands on the BSE and NSE till 10:56 am.