DCB remains preferred midcap pick

Published: January 15, 2015 12:55 AM

Maintain ‘buy’ on the bank and value the stock at Rs 140 (Rs 120 earlier) reflecting changes...

Maintain ‘buy’ on the bank and value the stock at R140 (Rs 120 earlier) reflecting changes to earnings and medium-term growth assumptions. At our target price, we are valuing the bank at 2.2x book and 16x EPS for RoEs in the range of 13-14% but strong earnings growth at 17-20% CAGR over the next few years. Despite the recent outperformance, we still think DCB is a good bank to own. The scope for valuation expansion is probably limited but we see this bank as a good earnings compounding idea over the long term. We don’t see RoEs expanding in the medium term as the bank would continue to keep cost growth at relatively high levels to build its liability franchise. A strong tier-1 ratio, low impairment risks, high growth phase and strong execution of the current management make it one of the best among peers. DCB remains our preferred mid-cap pick.

DCB reported 17% y-o-y growth in earnings (PBT grew 37% y-o-y) on the back of 34% y-o-y revenue growth. NII grew 30% y-o-y but was lower than expectations primarily due to lower yield on loans, which we believe has occurred due to the impact of higher restructuring of loans q-o-q. Strong contribution from treasury boosted non-interest income growth . The full benefit from the recently raised capital was offset by lower returns from loans. Loan growth was strong at 29% y-o-y primarily driven by mortgages. Slippages were negligible but restructured loans increased 100 bps to 5% of loans.

Kotak Institutional Equities

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