DCB Bank: Need To Sustain Above 88-93 Zone For 116-120; Q4 Surge In Provisions May Hurt Despite Above Expected Result

Trading Idea: DCB Bank

CMP: 83

Either sell below 80 or on rise around 88-93;

TGT: 75*-71-68*-63-55*-49 (1-3/6M)

TSL> 96

Note: Consecutive closing (3 days) above 96 for any reason, DCB may further rally up to 101-107* & 116-120* and 126-137* in the near to long term (alternative bullish case scenario).

Q4FY16 result of DCB was above street estimates but provisions may also be above consensus as it surged by nearly 90% (YOY) and 30% (QOQ).

Q4FY16 PAT was at Rs.69.5 cr against consensus of around Rs.50 cr (??) which is up by around 10% (YOY) and 69% (QOQ) supported by NII (+ 30% YOY & +5% QOQ) and other income (+33% YOY & +30% QOQ)

Q4FY16 NIM was at 3.94% against 3.72% (YOY) and earlier management guidance of around 3.50% (for increasing competition and adoption of new base rate calculation methodology).

But asset quality improved significantly despite higher provisions and net NPA dipped to 0.75% from 1.01% (YOY) and 1.12% (QOQ).

Overall FY16 PAT was around Rs.194.50 cr against FY15 figure of Rs.191.20 cr (+1.73% growth.).

Q4FY16 EPS was at 2.42 (consensus 1.75; YOY-2.18; QOQ-1.43)

As par the DCB management, although they are quite satisfied with the Q4 performance and continue to expand distribution/branch expansion while investing in digital banking and very optimistic about retail & SME/MSME banking, they will go ahead with some cautious and calibrated manner.

Currently DCB has 200 branches Pan India and it plans to add 100 more by FY18 to take the total number around 300 plus. The bank sees significant challenges (competition and attrition) once the 21 new entities (payment & small finance banks) enter the banking system. But UPI may help the traditional full banks, specially the smaller banks like DCB as "pay wallets" may soon become obsolete once UPI fully kicks in.

DCB also planning to add 600 more employees in FY17 against 1000 added in FY16. With the planned branch expansion and head counts along with investment in digital banking; i.e. higher capex for enhancing scale of operations, cost to income (CI) ratio is expected to be on the higher side.

FY16 CI stands around 58.45% (YOY-58.83% against last five years average of 67.24%). Some analysts were assuming it around 60% & 64% for FY16/17. As new branches will take time for break even, its only after FY18, we may see visible improvement in CI and bottom line.

Over the last few years, DCB has steadily slashed its non secured credit books and now around 50% of loan books are secured by mortgages.

The bank is aiming a credit mix of around 40% retail, 20-30% SME/MSME, 15% agri and 25% corporate in the long term.

On the YOY basis, net retail advances grew by 36% and overall net advances including corporate banking grew by 23%. The bank clearly has more thrusts on retail & SME/MSME lending.

 

For DCB Bank:

Q4FY16 TTM EPS: 6.75 (FY16; estimate 6.08)

Projected FWD EPS: 7.25-7.70-8.20 (FY:17-19)

Average PE: 15

As par BG metrics & current market scenario:

Present median valuation may be around: 94 (Q4FY16/TTM)

Projected fair valuation might be around: 97-100-105 (FY:17-19/FWD)

SCRIP	EPS(TTM)	BV(Act)	P/E(AVG)	Low	High	Median	200-DEMA	10-DEMA
DCBBANK	6.75	54	15	96.27	91.00	93.63	91.54	81.78

DCBBANK

7.25

66.45

15

99.77

94.31

97.04

91.54

81.78

DCBBANK

7.7

81.75

15

102.82

97.19

100.01

91.54

81.78

DCBBANK

8.2

100.55

15

106.11

100.29

103.20

91.54

81.78

Analytical Charts: