DCBBANK - BUY ( + ) Target Price Rs. 132 :: Kotak Sec,report

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DCBBANK
Recommendation BUY ( + )	Target Price Rs. 132

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Q3FY15 results: Moving on right track
Stable margin aided in healthy core performance - NII grew 29.7% YoY; net
income was also in-line with our expectation on back of strong trading
gains and containment of opex. Although NIM has remained stable QoQ,
management has guided about the pressure on its asset yield due to
increase in competitive intensity as well as investment required in the low
yielding RIDF bonds. CASA mix is trending lower (in line with the
expectations) as overall deposits have to grow faster than the CASA to fund
its B/S growth.
Asset quality has remained stable with healthy provision coverage ratio.
Outstanding restructured book is relatively comfortable at Rs.1.1 bn (1.2%
of net advances) with lower stressed portfolio (net NPA + restructured book)
at 2.2% of net advances. We believe DCB bank continues to be a potential
re-rating candidate with opex improvement on track, healthy asset quality,
stabilizing credit costs and comfortable core capital (tier-I: 13.6%). As stock
trades at reasonable valuation (1.8x FY17E ABV), we retain BUY rating on
the stock with upward revised TP of Rs.132 (2.0x FY17E ABV; Rs.103 earlier)
by rolling over to FY17 estimates

Healthy margin aided in strong core performance; net income
was also in-line with our expectations on back of strong treasury
gains and containment of opex.
NII (Rs.1.22 bn; 29.7% YoY) grew at strong pace largely aided by sequentially stable
margin (3.70% in Q3FY15) and robust loan growth (28.9% YoY). NIM has remained
stable (QoQ) as improvement in yield on investment book (~60bps QoQ) neutralized
the negative impact of fall in yield on advances (9bps QoQ) while cost of deposits
remained stable. Although NIM remained stable (QoQ), it was 15bps higher YoY,
despite sharp fall in yield on advances (46bps decline YoY).
Management has continued to guide about the pressure on its asset yield due to
increase in competitive intensity as well as investment required in the low yielding
RIDF bonds (to meet sub-PSL category requirements). We are modeling compression
in NIM (3.57%/3.55% in FY16/17E as against 3.7% achieved during 9MFY15)
largely driven by decline in yield on assets in the increased competitive environment.
We also believe bank has limited scope to improve its LDR from current levels to
sustain its NIM.
Trends in NIM (%)
Source: Company
Non-interest income grew at strong pace (46.1% YoY) on back of robust growth in
treasury profit (6x YoY) and healthy fee-based income (17.2% YoY) translating into
34.0% YoY growth in net revenue. However, PAT growth was moderate at 16.9%
(Rs.425 mn) largely due to higher tax provisions (tax rate at ~15% in Q3FY15 as
against nil tax paid during Q3FY14) as well as additional provisions done on restructured
portfolio (Rs.40 mn) and general provision (Rs.60 mn).
Strong loan growth largely driven by agri, corporate & retail segments;
CASA mix is trending lower, in line with the expectations
DCB's loan book grew at strong pace (28.9% YoY) largely on back of robust growth
in agriculture, corporate and retail segments while SME/MSME book continued to
witness run-down (flat QoQ) led by focus on low ticket loans (less than Rs.30 mn).
Among retail segment, mortgage (40.3% YoY) continued to do well. Management
has indicated about the asset mix - retail/mortgage (40%), MSME/SME (15-20%)
and corporate (20-25%). They have also guided to double the balance sheet in next
36-42 months.

Gradual opex improvement on track; maintain BUY as stock
trades at reasonable valuation
We have seen consistent improvement in its cost/income ratio from 68.6% in FY13
to 62.9% in FY14. Bank has contained the C/I ratio at 59.8% in Q3FY15 despite
adding 30 branches during last one year. We are modeling C/I ratio to improve to
~55% by FY17 as incremental branch expansion is taking place in tier 3-6 cities with
management's focus on enhancing efficiency.
We are tweaking the earnings estimates of DCB bank for FY15/16E and introducing
FY17 numbers. We expect bank to report earnings growth of 17.1% CAGR during
FY14-17E along with healthy return ratios (RoE: ~13%, RoA: ~1.1%) during FY17E,
post normalization of tax rates. We believe DCB bank continues to be a potential rerating
candidate with opex improvement on track, healthy asset quality, stabilizing
credit costs and comfortable core capital (tier-I: 13.6%). As stock trades at reasonable
valuation (1.8x FY17E ABV), we retain BUY rating on the stock with upward
revised TP of Rs.132 (2.0x FY17E ABV; Rs.103 earlier) by rolling over to FY17 estimates.

LINK
http://www.kotaksecurities.com/pdf/pdfs/FUNDDCBBANK15012015102856.pdf