Buy DCB Bank; target of Rs 131: FinQuest Securities

FinQuest Securities' report on DCB Bank

"Development Credit Bank (DCB Bank) after its strategic overhaul since FY09 has made remarkable journey by achieving a 73% CAGR in profits along with business growth of 23% CAGR over FY11-14 despite macro headwinds. This growth was achieved with DCB bank adopting secured & diversified the credit profile by focusing on high yielding segment, increasing the retail deposit share to curtail costs. This remarkable journey was achieved with DCB Bank's branch expansion mode - it opened 62 branches since FY11. DCB Bank is a small new generation private sector bank with a network of 142 branches and 252 ATMs as of September 2014. Its branches are concentrated in western & northern India with 61% of branches located in Maharashtra, Gujarat, New Delhi, Punjab and Goa. Going ahead, DCB Bank is expanding its branch network which is likely to result in a business growth of ~26% CAGR during FY14-17E. On back of this we expect bank to continue its profitability run with 36% CAGR growth during FY14-17E. We believe, this growth seems to be achievable due to its diversified loan book, efficient retail deposits, reduction in overall costs and improvement in asset quality."

"Revamping of business helped the bank to return to profitability in the last few years and going forward, we believe bank is set for next growth phase on back of i) strong balance sheet growth ii) branch expansion to augment CASA iii) improving asset quality by FY17E iv) decline in C/I ratio. At the CMP stock trades at 1.8x & 1.6x FY16E & FY17E adjusted book value (ABV) respectively. After recent capital infusion of Rs 2.5 bn we expect return ratios i.e. RoE to be ~13% in FY15E. DCB Bank is well capitalized for future growth opportunities, thus we value the bank at 1.9x FY17E ABV and arrive at a target price of Rs 131 with an upside potential of 24% from the CMP, for the investment horizon of 12-18 months. We initiate coverage on the stock with "Buy" rating," says FinQuest Securities research report.

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