DCB Bank shares hit week’s low after its Q1FY20 earnings fell QoQ; Should you buy or sell stock?

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Updated: Jul 17, 2019 11:25 AM

After DCB Bank reported Apr-Jun results on Tuesday, the stocks of private lender bank fell significantly in the early trade on Wednesday.

DCB Bank shares trade low on Wednesday after the bank reported its Q1FY20 results a day before.

After DCB Bank reported Apr-Jun results on Tuesday, the stocks of private lender bank fell significantly in the early trade on Wednesday. At 10:25 AM on BSE, the DCB stock was seen trading at Rs 212.20 per share, down 11 per cent from the last close.  While the bank’s Apr-Jun profits after tax for the current fiscal rose 17 per cent year-on-year, the earnings plunged by 16 per cent on a quarterly basis on account of muted revenue growth and high provisioning owing to elevated slippages, according to ICICI Securities. The brokerage firm has downgraded the stock to ADD from BUY with the target price unchanged at Rs 265 per share in view of the recent run-up in stock price and near term challenges on asset quality. 

“Despite a financially weak quarter, we remain positive on management’s ability to successfully navigate this challenging period. Further, the management remained committed to its long-term growth strategy and achieving RoA of 1.25% over the next three years. Its focus on the effective use of capital and a sharp improvement in productivity in FY19 gives us reason to believe that DCB is on the right track,” ICICI Securities said in a report. 

Cost remained well under control as reflected in a 4.7% QoQ growth despite higher employee cost. Loan growth moderated to a multi-quarter low of 13% YoY vs 24% CAGR over FY14-FY19. Asset quality deteriorated marginally in Q1FY20 with a sharp increase in commercial vehicle/construction equipment and (Agri Inclusive Banking) AIB NPA. However, the management sounded confident about maintaining asset quality and also highlighted that it has already strengthened the collection process in Jan 19, the brokerage firm noted. 

Reliance Securities has revised its recommendation on the DCB Bank stock to HOLD from BUY with an unrevised Target Price of Rs 230. While the management’s focus on low-ticket granular loans and efforts towards cost rationalisation will continue to aid its asset quality and returns over the time, the brokerage house doesn’t rule out current growth and asset quality concerns to weigh on DCB Bank’s earnings profile in the interim. In that context, current valuations at 2.1x of FY21E A/PBV (against a RoA of 1.1%/1.3% for FY20E/21E) seem to have factored in most positives, Reliance Securities noted. 

The DCB Bank is focusing on granular retail term deposits in order to further improve its deposit profile. Some margin pressure will be felt for two more quarters after which stability will sweep in due to repricing profile of long term refinance and renewal cycle of customer deposits, according to Murali M Natarajan, Managing Director and Chief Executive Officer of DCB Bank. 

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