DCB Bank - Stock Analysis

DCB bank has a 90-year-old history formed by the merger of two co-operative banks, to form the Development Co-operative Bank. The bank went on to obtain a scheduled bank license from the RBI in the year 1995 changing its name to Development Credit Bank. The bank raised its IPO in the year 2006. Later, in the year 2014, the bank’s changed its name to DCB Bank Ltd.

DCB Bank has a total of 333 branches across 19 states and 3 union territories in India. Its books mainly consist of the small tickets, secured loans, generally the non-salaried segment. The company aims to double its loan book, maintaining the same mix in its books within a coming couple of years.

What is Good?

The bank has a loan book that is 96% secured. This gives them ease of recovery and keeps its NPAs at a minimal level. DCB Bank boasts of a GNPA of just 1.84% and an NNPA of just 0.65%. There are just 2-3 banks with better NPA figures.

The bank has reduced its cost-to-income ratio to a large extent and has brought it down from 60% to 53% within the span of one year. 

Management Analysis-

The DCB Bank is headed by Nasser Munjee, Chairman and Mr. Murali Natrajan, MD, and CEO. The management has successfully created a turnaround for DCB Bank after its crisis state in 2009. The new management. All the performance parameters have improved significantly owing to the efforts of the management.

The bank is focused on its objectives and has proved time and again to deliver what is promised or estimated. Mr. Natrajan estimated the cost-to-income ratio to go below the 55% mark by the 4th quarter of FY19 and the results complemented this showing the ratio at 53.71%. 

Its expansion plans were also clearly stated and went as planned. Mr. Natrajan has said that the bank plans to double its loan book within the next 2-3 years, and the bank is on the right track moving towards this objective.

Management score: 10/10

Industry Analysis-

DCB Bank mainly caters to the self-employed population of India. MSMEs play a pivotal role in the economic and social development of our country. There are over 63 million working enterprises employing over 111 million people in this segment. 

Research suggests that the MSME and SME sector could create over 1 crore jobs within the next 5 years if nurtured well. Also, several central and state governments have seen this opportunity and are making efforts to enhance the flow of bank funding to strengthen this sector. 

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Industry score: 8/10

Business analysis-

DCB Bank is a relatively small bank compared to banking giants like HDFC, ICICI, etc. This is because it caters to a niche market. The bank had gone on an expansion spree doubling its number of branches within a span of 2 years from just 160 branches in 2015 to 316 branches in 2017. Currently, the bank has 333 branches.

DCB Bank’s strategy is to rely mainly on Retail Deposits (CASA), grow NRI deposits and limit its dependency on bulk. It concentrates on tier 2 to tier 6 locations growing retail mortgages, MSME, SME, Commercial Vehicle, Tractor Finance, Gold Loan, Mid- Corporate and Agri Loans.

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Business score: 9/10

Valuation

• The stock is currently trading at a PE of 21.93
• The valuation of this bank was done by estimating the future growth rate in the book value of the bank. DCB bank witnessed very healthy growth rates under the new management which took over in the year 2009. In the last five years, the bank’s book value grew at a CAGR of 17%. 
• The bank’s future growth rate was estimated and an appropriate PB multiple was considered for the fair valuation. The future estimated share price was estimated and discounted to today’s value at a reasonable discount rate to arrive at a fair valuation after which a 15% margin of safety was applied to nullify any errors in estimations.
• The stock is clearly overvalued. This valuation is completely based on personal opinion. The valuations are based on growth estimates which are not certain but only probable.

Valuation: 4/10

Total Score:31/50.

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Disclaimer- The article is for educational purposes only. Nothing in this article should be interpreted as investing advice.
Disclosure- We might have recommended this stock to our advisory clients.