Axis Securities

DCB Bank (Buy)

Target: ₹115

CMP: ₹93.85

We initiate coverage on DCB Bank with a Buy recommendation and a target price of ₹115. We believe in the robustness of DCB’s business model backed by its past performance of maintaining healthy asset quality despite multiple headwinds such as demonetisation and GST roll-out which had impacted the bank’s core customer base of self-employed borrowers.

While growth has moderated in the past couple of years due to macroeconomic headwinds, DCB has managed to grow the book at 15 per cent CAGR over FY16-21. The bank’s minimal geographic concentration in contrast to most of its mid-cap peers highlights its balanced approach and is expected to bode well for its scalability perspective in the long term. Though near-term headwinds exist, we expect the bank to successfully sail smoothly through the prevailing tough period backed by: retail-focused diversified and secured portfolio; ROA expansion through cost rationalisation efforts; and gradual improvement in the asset quality led by strong recoveries.

Moving forward, while an improvement in the collection efficiency is encouraging, the heightened possibility of Covid 3 will continue to remain an overhang on the banks’ near-term performance. This is expected to push back credit growth pick-up to FY23 and against this backdrop, we value DCB at 0.8x FY24 ABV.

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