As Tamilnad Mercantile Bank IPO opens today, should you subscribe?

The initial public offering (IPO) of Tamilnad Mercantile Bank (TMB), one of the oldest private sector banks in India, is set to open on September 5. The issue is generating positive responses from analysts and investors.

Most analysts said retail investors should apply for the IPO citing consistent financial performance and healthy asset quality. At the same time, a few are cautious in the short term as they see a couple of risks.

“At the upper end of the price band, the bank is valued at 1.35 times price to book value (after issue) as on 31 March 2022 which looks reasonable. However, a change in management and pending legal proceedings in relation to shareholding remain risks,” said Kajal Gandhi at ICICIdirect.

The broker said investors can apply for the IPO with a long term view. As much as 37.7 percent of equity share capital is subject to legal proceedings, which ICICI Securities said is a key risk. Besides, significant regional concentration in southern India also poses a risk.

The company has set a price band for the IPO at Rs 500-525 a share. The offering is a fresh issue of shares worth Rs 832 crore. An investor can apply for a minimum 28 shares and in multiples thereof.

Meanwhile, the firm issued 71,28,000 shares at Rs 510 apiece to raise Rs 363.53 crore from 10 anchor investors ahead of its IPO. Anchors are Nomura, Societe Generale, Max Life Insurance, Kotak Mahindra Life Insurance, Bajaj Allianz Life Insurance, Cholamandalam General Insurance, Authum Investment, Alchemie Ventures, Moneywise Financial Services, and Blend Fund.

YES Securities rated the issue ‘subscribe’ as it sees stable and benign asset quality, reasonable loan growth and operating expense control, and healthy net interest margin.

“At the upper end of the price band, TMB would trade at an FY22 P/B of 1.4 times. For FY22, it has delivered a return on assets of 1.7 percent and a return on equity of 16.6 percent. Importantly, given the business model of TMB, we do not see these return ratios as volatile going forward. Consequently, we find the IPO valuation for the bank as eminently attractive,” said Shivaji Thapliyal of YES Securities.

The lender offers a wide range of banking and financial services primarily to micro, small and medium enterprises, agricultural and retail customers. It has 509 branches, of which 106 are in rural, 247 in semi-urban, 80 in urban and 76 in metropolitan centres. Its overall customer base was 50.8 lakh as of FY22-end and 80 percent of its customers have been associated with the bank for more than five years.

Religare Broking also has a favourable view on the stock. It said the bank is well placed to capitalise on growing industry trends given the strong growth potential in geographies where the company is present.

“Moreover, the firm would focus on improving technology which would help them achieve higher operational efficiency and improved drive customer experience,” it said.

Others that advise subscribing to the issue include Ventura Securities and Nirmal Bang.

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