90-70 Might Be Proved As A Good Demand Zone
It may be another case of "buying a good business in distress or in an unusual conditions"
And it may be a M&A target also in future
CMP: 92
Buy: 90-70
TGT: 122-135 (5-30 days)
TGT: 150-175 (12-24M)
TSL<60
Note:Consecutive closing below 60 for any reason, DCB may further crash to 50-35 area, where it can be again accumulated for investment purpose & better buying averages.
Rationale:
Apart from below street estimate Q2FY16 result to some extent, we all know the reasons behind DCB's massive fall. Post result on Wednesday evening, the management hinted that the bank is going to add around 150 branches by next one year taking the total branches to around 310. Consequently the capex and incremental headcounts (salary costs for new employees) may affect the bottom line of the bank substantially for FY:16-18 and one can expect return (profit) from those expanded branches only from FY:20-22.
Previously, the bank guided for 25-30 branches expansion per year.
As a result, almost all the analysts who were quite bullish on DCB bank, almost turned back and immediately downgraded it for an average target of 90 citing lower ROE for this sudden expansion cost and the stock reached almost there in two days from 140 level (i.e. 30% in two days) !!
Now, on the part of the management, its nothing wrong to foresee the likely competition from numerous small & payment banks who got licenses from RBI recently and some of them are backed by major corporate groups, start ups flush with funds. The bank may also undertake the guided expansions of "brick & mortar" branches in future in a staggered manner to combat the growing competition as retail & SME lending is its major business beside some corporate lending. Also, the proposed expansion in tire 2 to tier 6 cities will help it improve its CASA and priority sector lending. The bank also managed its deteriorating NPA situation few years ago quite well and now in a comfortable position after the new management took charge.
Q2FY16 PAT fall by 10% (YOY) primarily due to sharp jump in provisions and lower treasury income.
The DCB management also sees lower NIM, high competition and price wars in all products & segments, priority sector lending and proposed move by RBI towards lower base rate to be calculated on marginal costs of funds.
DCB is also foraying actively in digital banking and there may be no comparison between a full fledged bank and a no-frill bank (like payment bank).
But all the above news might be already discounted by the market to a great extent going by the recent price action of the scrip. If DCB feels the heat for growing competition from existing as well as proposed banks (small or payment entities), then it may be also applicable for other small banks (private or PSU).
Now , under fire from market for this sudden change in expansion & capex strategy, the DCB management issued an official statement yesterday evening that "they are looking at all the pros & cons of the same and will expand its branches in a slow & steady way over the next two years in lieu of the one year as earlier suggested". The bank will take a prudent & cautious view for this branch expansion issues on a case-to-case basis.
As DCB relied much on branch lending in retail & SME, it has to expand in a calibrated manner, keeping in view of all the feedback from its highest management (Chairman) and the concerned analysts.
Now , under fire from market for this sudden change in expansion & capex strategy, the DCB management issued an official statement yesterday evening that "they are looking at all the pros & cons of the same and will expand its branches in a slow & steady way over the next two years in lieu of the one year as earlier suggested". The bank will take a prudent & cautious view for this branch expansion issues on a case-to-case basis.
As DCB relied much on branch lending in retail & SME, it has to expand in a calibrated manner, keeping in view of all the feedback from its highest management (Chairman) and the concerned analysts.
Looking ahead, India may not be the place for so much "Banks" here and there as full banking operation is not so easy, considering the huge capital requirement of it and Basel-III norms beside question of viability. Thus, consolidation is bound to happen in the banking space (private as well as PSU) and only major groups having very deep pocket will survive in this game.
We might see some M&A in the banking space for small banks like DCB and others in the coming days. Perhaps RBI is also creating a parallel set of banks for future by giving licenses for partial banking to some major groups, considering the huge stressed assets in our banking system, specially in PSBS.
Many big corporate houses who are flush with funds but still not get the much aspired banking license , may also like to grow in an inorganic way by acquiring a small bank having extensive branch networks in future.
Many big corporate houses who are flush with funds but still not get the much aspired banking license , may also like to grow in an inorganic way by acquiring a small bank having extensive branch networks in future.
As par BG metrics & current market trend, fair valuation of DCB might be (based on previous EPS forecast prior to the new guidance):*
Present median value: 120 (FY-15)
Projected fair value: 135-145-155 (FY:16-18)
| SCRIP | EPS(TTM) | BV(Act) | P/E(AVG) | Low | High | Median | 200-DEMA | 10-DEMA |
| DCBBANK | 6.82 | 54.17 | 16 | 115.37 | 117.67 | 116.52 | 121.97 | 126.89 |
| DCBBANK | 8.85 | 65.85 | 16 | 131.42 | 134.04 | 132.73 | 121.97 | 126.89 |
|
| DCBBANK | 11.75 | 97.25 | 16 | 151.43 | 154.45 | 152.94 | 121.97 | 126.89 |
In the changed guidance scenario because of "massive expansion", if we assume 15% de-growth in EPS from the above projected earlier EPS over the next two/three years, then the fair value of DCB may be in the range of 120-140 (FY:16-18).
Analytical Charts:
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