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“DCB has all the right ingredients for a scalable model, namely a stable top management, a non-unionised workforce, a metro-centric branch network and high capital adequacy. These factors convince us that DCB is potentially on the cusp of a high growth phase with an improving profitability profile. We model return on equity to improve from 10.7 per cent in FY13 to 15.3 per cent in FY15,” says Saikiran Pulavarthi, analyst at Espirito Santo Securities.
The stock, which has underperformed the Sensex in the past year, should see this trend change for the better. For now, valuations of one time its FY14 estimated book are also reasonable; at a discount to its larger (closest) peers such as ING Vysya and Federal Bank, among others. According to Bloomberg data, most analysts have a Buy rating on the DCB scrip with an average one-year target price of Rs 60.4, translating into upsides of almost 50 per cent from the current levels of Rs 41.
In a bid to clean up its balance sheet, over the past three years DCB has churned its loan portfolio to get rid of its unsecured retail and corporate exposures. Consequently, its gross non-performing assets (GNPAs) fell from 8.7 per cent in FY10 to 3.8 per cent in the December 2012 quarter. In FY14 as well analysts expect this metric to fall to 2.7 per cent levels. “Even though stress is eminent in the SME/MSME segment, we believe DCB’s asset quality will likely hold up due to strong collateral on the SME/MSME book, corporate exposure to highly-rated corporate book and fully secured retail book. We expect GNPAs to decline to 2.2-2.3 per cent levels by FY15,” says Manish Agarwalla, analyst at PhillipCapital India Research. The retail (largely mortgage) and small and medium enterprises (SMEs/MSMEs) now form about 65 per cent of its loan book, agriculture 10 per cent and the rest from corporates.
As regards business growth, analysts expect DCB’s loan book to grow at a robust rate of over 20 per cent over FY13-15; driven by strong branch expansion. With a large part of its upcoming branches set to come up in Tier-II and Tier-III cities, the bank’s cost to income ratio is likely to come down sharply from 71 per cent in the nine months ending December 2012 to 60 per cent in FY15, believe analysts.
DCB has also cut its funding from bulk deposits in favour of retail deposits, which now forms 83 per cent of its liabilities as against 52 per cent in FY08. However, DCB faced constraints while tapping short-term money market instruments due to its lower credit rating versus peers. Crisil’s recent ratings upgrade (for Tier-II bonds and CDs) will enable DCB to tap wholesale funding sources (at competitive rates), which in turn will reduce its cost of funds, and increase options to meet its funding requirements. This should rub off favourably on the bank’s net interest margins.
Rising competition from existing and upcoming new players and any unprecedented deterioration in its asset quality remain key risks to its growth.
