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Dhanlaxmi Bank
Rapid business growth; maintain Buy
Dhanlaxmi’s 3QFY11 profit improved 450% yoy, led by 87.8%
yoy growth in NII and improved productivity. However, we
lower our FY11e and FY12e EPS by 37.4% and 34.2%
respectively, given the delay in materialization of expected
improved productivity and higher NPA provisions. We reduce
our target price to `152 from `240 due to lower RoE. We
maintain Buy as we expect rapid business growth, improving
NIM and productivity to double RoA by FY13e, to 0.6%.
Rapid business growth, higher margin. The bank continued
on its rapid business growth strategy path – advances grew 77%
yoy, and deposits 75.5% yoy. , at 2.6%, was 10bps higher yoy, as
the bank increased the share of secured retail lending. CASA grew
an impressive 60.7% yoy, with +100% yoy rise in current account.
Improving fees and productivity. Non-interest income, ex
Treasury, substantially increased (128.3% yoy). Although 3QFY11
cost-to-income improved 679bps yoy to 83.5%, it is still higher
than peers’. We raise our FY11e and FY12e operating expense
4.1% and 10.8% respectively as we believe the bank is likely to
continue investing in human capital and technology to sustain
rapid growth.
Improved asset quality. Gross NPAs decreased 8.6% qoq. NPA
coverage improved 692bps to 50.7%. The management is likely to
ask RBI for more time to reach the 70% NPA coverage norm.
Valuation and risks. At our target price of `152, Dhanlaxmi
would trade at 1.4x FY12e and 1.3x FY13e ABV. Key risks: Morethan-expected operating costs and higher-than-expected slippages.
Results review
Rise in 3QFY11 profit by 450% yoy, albeit lower than expected, was
led by 87.8% yoy growth in NII and better productivity for the bank.
We lower our FY11e and FY12e EPS 37.4% and 34.2% respectively,
given the delay in materialization of expected improved productivity
and higher NPA provisions. Also, we reduce our target price to `152
from `240 owing to lower RoE. We retain our Buy recommendation
as we expect the rapid business growth, improving NIM and
productivity to double RoA by FY13e to 0.6%.
Rapid business growth, higher NIM
Dhanlaxmi Bank’s net interest income for the quarter was up an
impressive 87.8%, driven by its rapid business growth of 76.1% yoy.
Deposits grew marginally slower, at 75.7% yoy, compared with advances
growth of 77% yoy.
Shift to secured retail lending
Composition of the advances book is seeing significant change, with
incremental lending driven by secured retail and SME advances. Share of
retail rose to 38% of the advances book by end-3QFY11 from 18% in
1QFY11. The bank has achieved its target for priority-sector lending well
in advance.As per the management share of MFI loans stands at `
1.5bn,of which less than 5% is from the state of Andhra Pradesh .
We maintain our estimate for the bank’s rapid growth in business and NII,
of 65.7% and 71.7% CAGR respectively over FY10-13e.
Higher net interest margin
NIM for the quarter improved 10bps yoy to 2.6%, as the bank’s asset
repriced faster than liabilities with its sharper focus on retail and SME
lending. Credit-to-deposits were at a sustainable 73.8%, with liabilities
growing in line with assets. This gives the bank additional leeway to
improve its NIM. We expect the NIM to improve 39bps over FY10-13e to
2.59%, driven by its sharper focus on higher-yielding assets.
CASA growth at +60%
Dhanlaxmi’s CASA grew an impressive 60.7% yoy, led by higher growth
of more than 100% yoy in the current account, a result of various strategic
initiatives such as investment in an online brokerage firm. We expect such
measures to push up the CASA share to 25% by FY13e from 21.6% in
2QFY11.
Robust fee-income growth, good potential ahead
Fee income is a key management focus area. Non-interest income, ex
trading gains, jumped 128.3% yoy, driven by higher traction on fee income
from insurance products. With the expected greater exposure to retail and
SME, we estimate fee income at a respectable ~1.13% of average earning
assets over FY10-13.
Productivity – Still some way to go
Although 3QFY11 cost-to-income improved 679bps yoy to 86.5%, it is
still the highest among peers and higher than our estimates due to a delay
in materialization of the benefits of its strong operating leverage.
We believe the potential for improvement in productivity is significant;
however, it would be slower than assumed earlier, as the bank is likely to
continue investing in human capital and technology to sustain its rapid
growth. We raise our FY11e and FY12 operating expense 4.1% and 10.8%
respectively to factor in higher wages for employee retention.
We expect cost-to-assets to fall to 2.6% by FY13e from 2.8% in FY10,
fuelled by rapid business growth, rising profitability and significant
operating leverage.
Asset quality improves
Gross NPAs fell 8.6% qoq, led by more recoveries. NPA provisioning
increased 692bps qoq to 50.7%. Management is likely to apply for further
extension, till Sep ’11, to reach the 70% mark.
We raise our credit cost estimates for FY12 by 21.5% to factor in
additional delinquencies on account of higher slippages from legacy SME
portfolio and to reach the regulatory 70% NPA provisioning mark.
Capital raising plans announced
Capital adequacy stands at 13.4%, with tier-1 of 10.7% as per Basel II
norms. The bank has announced fund-raising plans by dilution of up to
55m equity shares to bolster its high-growth plans and capitalize it against
loan defaults. However, we await further clarifications on the mode and
timing of capital raising.
Valuation
At the current market price, the stock trades at 1.2x FY11e and 1.1x
FY12e ABV. At our target price of `152, it would trade at 1.4x FY12e
and 1.3x FY13e ABV. Our target price is based on the two-stage
dividend-discount model (CoE: 14.2%; beta: 1.03; Rf: 7.5%).
Risks
1. Higher-than-expected operating expenditure, which could lead to
lower productivity gains and affect profitability.
2. Higher credit costs due to higher-than-expected slippages could lead
to earnings growth being lower than estimated.
Financials
We expect a 66.4% CAGR in the loan book over FY10-13, with a
80.7% net profit CAGR.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Dhanlaxmi Bank
Rapid business growth; maintain Buy
Dhanlaxmi’s 3QFY11 profit improved 450% yoy, led by 87.8%
yoy growth in NII and improved productivity. However, we
lower our FY11e and FY12e EPS by 37.4% and 34.2%
respectively, given the delay in materialization of expected
improved productivity and higher NPA provisions. We reduce
our target price to `152 from `240 due to lower RoE. We
maintain Buy as we expect rapid business growth, improving
NIM and productivity to double RoA by FY13e, to 0.6%.
Rapid business growth, higher margin. The bank continued
on its rapid business growth strategy path – advances grew 77%
yoy, and deposits 75.5% yoy. , at 2.6%, was 10bps higher yoy, as
the bank increased the share of secured retail lending. CASA grew
an impressive 60.7% yoy, with +100% yoy rise in current account.
Improving fees and productivity. Non-interest income, ex
Treasury, substantially increased (128.3% yoy). Although 3QFY11
cost-to-income improved 679bps yoy to 83.5%, it is still higher
than peers’. We raise our FY11e and FY12e operating expense
4.1% and 10.8% respectively as we believe the bank is likely to
continue investing in human capital and technology to sustain
rapid growth.
Improved asset quality. Gross NPAs decreased 8.6% qoq. NPA
coverage improved 692bps to 50.7%. The management is likely to
ask RBI for more time to reach the 70% NPA coverage norm.
Valuation and risks. At our target price of `152, Dhanlaxmi
would trade at 1.4x FY12e and 1.3x FY13e ABV. Key risks: Morethan-expected operating costs and higher-than-expected slippages.
Results review
Rise in 3QFY11 profit by 450% yoy, albeit lower than expected, was
led by 87.8% yoy growth in NII and better productivity for the bank.
We lower our FY11e and FY12e EPS 37.4% and 34.2% respectively,
given the delay in materialization of expected improved productivity
and higher NPA provisions. Also, we reduce our target price to `152
from `240 owing to lower RoE. We retain our Buy recommendation
as we expect the rapid business growth, improving NIM and
productivity to double RoA by FY13e to 0.6%.
Rapid business growth, higher NIM
Dhanlaxmi Bank’s net interest income for the quarter was up an
impressive 87.8%, driven by its rapid business growth of 76.1% yoy.
Deposits grew marginally slower, at 75.7% yoy, compared with advances
growth of 77% yoy.
Shift to secured retail lending
Composition of the advances book is seeing significant change, with
incremental lending driven by secured retail and SME advances. Share of
retail rose to 38% of the advances book by end-3QFY11 from 18% in
1QFY11. The bank has achieved its target for priority-sector lending well
in advance.As per the management share of MFI loans stands at `
1.5bn,of which less than 5% is from the state of Andhra Pradesh .
We maintain our estimate for the bank’s rapid growth in business and NII,
of 65.7% and 71.7% CAGR respectively over FY10-13e.
Higher net interest margin
NIM for the quarter improved 10bps yoy to 2.6%, as the bank’s asset
repriced faster than liabilities with its sharper focus on retail and SME
lending. Credit-to-deposits were at a sustainable 73.8%, with liabilities
growing in line with assets. This gives the bank additional leeway to
improve its NIM. We expect the NIM to improve 39bps over FY10-13e to
2.59%, driven by its sharper focus on higher-yielding assets.
CASA growth at +60%
Dhanlaxmi’s CASA grew an impressive 60.7% yoy, led by higher growth
of more than 100% yoy in the current account, a result of various strategic
initiatives such as investment in an online brokerage firm. We expect such
measures to push up the CASA share to 25% by FY13e from 21.6% in
2QFY11.
Robust fee-income growth, good potential ahead
Fee income is a key management focus area. Non-interest income, ex
trading gains, jumped 128.3% yoy, driven by higher traction on fee income
from insurance products. With the expected greater exposure to retail and
SME, we estimate fee income at a respectable ~1.13% of average earning
assets over FY10-13.
Productivity – Still some way to go
Although 3QFY11 cost-to-income improved 679bps yoy to 86.5%, it is
still the highest among peers and higher than our estimates due to a delay
in materialization of the benefits of its strong operating leverage.
We believe the potential for improvement in productivity is significant;
however, it would be slower than assumed earlier, as the bank is likely to
continue investing in human capital and technology to sustain its rapid
growth. We raise our FY11e and FY12 operating expense 4.1% and 10.8%
respectively to factor in higher wages for employee retention.
We expect cost-to-assets to fall to 2.6% by FY13e from 2.8% in FY10,
fuelled by rapid business growth, rising profitability and significant
operating leverage.
Asset quality improves
Gross NPAs fell 8.6% qoq, led by more recoveries. NPA provisioning
increased 692bps qoq to 50.7%. Management is likely to apply for further
extension, till Sep ’11, to reach the 70% mark.
We raise our credit cost estimates for FY12 by 21.5% to factor in
additional delinquencies on account of higher slippages from legacy SME
portfolio and to reach the regulatory 70% NPA provisioning mark.
Capital raising plans announced
Capital adequacy stands at 13.4%, with tier-1 of 10.7% as per Basel II
norms. The bank has announced fund-raising plans by dilution of up to
55m equity shares to bolster its high-growth plans and capitalize it against
loan defaults. However, we await further clarifications on the mode and
timing of capital raising.
Valuation
At the current market price, the stock trades at 1.2x FY11e and 1.1x
FY12e ABV. At our target price of `152, it would trade at 1.4x FY12e
and 1.3x FY13e ABV. Our target price is based on the two-stage
dividend-discount model (CoE: 14.2%; beta: 1.03; Rf: 7.5%).
Risks
1. Higher-than-expected operating expenditure, which could lead to
lower productivity gains and affect profitability.
2. Higher credit costs due to higher-than-expected slippages could lead
to earnings growth being lower than estimated.
Financials
We expect a 66.4% CAGR in the loan book over FY10-13, with a
80.7% net profit CAGR.
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