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Investment phase over – Focus on improving productivity
Dhanlaxmi bank has achieved a growth in advance and deposit at a faster pace compared to industry in FY10
and FY11 (advances grew by 57% in FY10 and 81% in FY11). Post completion of investment phase, the bank will
now focus on increasing business without additional cost to compete with the other players. We believe that the
bank will grow above industry during FY11 - FY13 with advances growing at a CAGR of 38.4% as the new
branches rolled out in FY09 and FY10 will break even in FY12 (retail and SME loans to contribute to the
incremental growth).
Shift to high yielding loans and low cost deposits likely to partially offset margin pressure
We expect the bank to focus on SME segment thereby increasing its proportion to approximately 25% of
advance by FY13 which will help the bank to partially offset pressure on margin in the near term. On the other
hand, increase in low cost deposits (CASA as well as NRI deposit) will enable the bank to withstand pressure from
rising rates in the near term and improve NIMs in the long run.
Fee based income to fuel growth
We believe that the bank will grow its fee based income owing to introduction of new products and services
towards retail (gold coins retailing, 3 in 1 trading account) and SME clients. Consequently, we expect fee based
income to grow at 30.4% CAGR over FY11 – FY13; processing fees and third party distribution being the major
contributor to the incremental growth.
Improvement in efficiency - Increased profitability
Dhanlaxmi Bank has witnessed a rise in cost to income ratio due to higher cost related to addition of employee,
implementation of IT infrastructure and rolling out new branches. Going forward, we expect cost to income ratio
to improve from 83.6% in FY11 to 77.0% in FY12 and 70.5% in FY13, as the bank focuses on improving
productivity without a substantial increase in its cost.
Credit cost likely to increase – Asset quality remains buoyant
Dhanlaxmi Bank has been able to improve its asset quality through continuous focus on recovery mechanism
(setting up of recovery cell with 100 employees) which led to a decline in GNPA from 2.9% in FY08 to 0.7% in
FY11. Going forward, we expect the bank to witness an increase in its credit cost due to focus towards retail and
SME segment, however, we do not expect a substantial deterioration in asset quality as the bank has a larger
proportion of retail loans exposed towards asset backed loans.
Outlook and Valuation
Post completion of investment phase made in FY09 – FY11, we believe that the management will now focus to
reap benefits on the same by improving efficiency and thereby return ratios in the medium to long term.
Therefore, we remain optimistic on the fundamentals of the bank in the long run.
In light of the recent correction in the stock price, the stock seems to be an attractive investment opportunity.
Currently, Dhanlaxmi Bank trades at 0.78x FY12E P/B and 0.74x FY13E P/B. We have arrived at an
'Outperformer' recommendation with a target price of INR105 by assigning one year forward P/ABV multiple
of 1.01x FY13E (re-rating will be considered once capital raising plans see some development) implying a
potential upside of 31.6%.
Key risks to our valuation are; delay in capital raising activity and higher than anticipated degradation in asset
quality. Our model is based on assumption that the bank is likely to witness a rise in efficiency in FY11 – FY13,
any variance in the actual performance compared to estimates could impact the anticipated profitab
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