Buy DCB Bank; target of Rs 118:Emkay

Emkay's research report on DCB Bank DCB Bank's 3QFY16 pre-provisioning profit growth was robust, driven by strong NII growth of 31.6%, healthy growth in fees (17.6% yoy) and a lower core cost-income of 60.7% (down 381bps yoy, 596bps qoq) Led by fresh slippages of Rs550m (2.1% of loans), chiefly from the SME segment, gross NPAs rose 4.7% qoq. NPA coverage (including technical write-offs) has risen qoq from 72.2% to 72.8%, and remains one of the highest among peers The bank is well capitalized with capital adequacy of 13% (tier-1 capital of 12.3%), which is more than sufficient to meet Basel-3 norms and business growth over FY15-17e We maintain Buy, as we expect robust profitability over FY15-18e, led by the bank’s prudent business growth strategy and superior asset quality. Our target of Rs118 is based on the two-stage dividend-discount model (CoE: 13.1%; beta: 1.1; Rf: 7.5%). Risks: Change in management, sharp rise in credit costs, irrational competition from large banks Led by fresh slippages of Rs550m (2.1% of loans), chiefly from the SME segment, gross NPAs rose 4.7% qoq. NPA coverage (including technical write-offs) has risen qoq from 72.2% to 72.8%, and remains one of the highest among peers. The management’s track record in managing asset quality is commendable, especially in the difficult macroeconomic environment seen over FY10-15. Over time, the bank has also reduced its concentration risks, both in advances and deposits. Also, the bank is well capitalized, with sufficient tier-1 capital of 12.3%, for 25% CAGR in business over FY15-17e For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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