NEW DELHI: The Rs 832-crore initial public offer (IPO) by Tamilnad Mercantile Bank (TMB) kicks off for subscription on Monday. On the table is a fresh issue of 1,58,40,000 shares being sold in Rs 500-Rs 525 price band. The professionally-managed private lender allotted 71,28,000 equity shares to 10 anchor investors on Friday, raising Rs 363.53 crore at Rs 510 apiece.

Most analysts said the asking valuations are attractive when compared with peers, but the bank’s future growth would be subject to pending legal actions. Some of them, therefore, have a ‘subscribe’ rating on the issue with a long-term view.

Here’s what brokerages are recommending:

Asit C Mehta: Subscribe for long-term gains
This brokerage said TMB is one of the oldest and leading private sectors in India and in the last three years, the bank has delivered strong revenue growth and margin expansion. Due to RBI’s direction for listing, its branch expansion plan was put on hold, but once it gets listed, it will expand its network, it said.

“TMB can be a good investment avenue owing to its better growth probability, healthy asset quality, and robust risk management system. It is equipped with basic retail banking infrastructure and a sizable market to grow. However, pending legal matters may impact TMB if the The verdict goes against the bank. At the upper price band of Rs 525, the stock is priced at 1.35 times its FY22 book value. We recommend subscribing to the issue from a long-term perspective,” it said.

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Yes Securities: Subscribe
YES Securities in its comparison of 11 small private banks said the 3-year FY19-22 loan CAGR for TMB at 8.1 per cent is the fourth best. The cost to assets for TMB at 2.2 per cent for FY22 stood at the fifth lowest, it said, adding that the cost to income ratio at 42.1 per cent for FY22 was the second best in its comparison universe. Meanwhile, the cost of deposits for TMB at 4.9 per cent for FY22 is the second highest in its universe, although not necessarily high in the absolute sense. “Importantly, given the business model of TMB, we do not see these return ratios as volatile, going forward. As a result, we find the IPO valuation for TMB as eminently attractive,” YES Securities said while suggesting a ‘subscribe’ on the issue.

KR Choksey: Neutral
At the upper price band of Rs 525 and book value of Rs 374.4 for FY22, the PB ratio works out to be 1.4 times, the brokerage said, adding that the FY22 ROA and ROE for the bank at 1.7 per cent and 16.6 per cent, respectively was better than its peers with a median of 0.8 per cent and 8.3 per cent, respectively. The brokerage said that the asking valuation reflects the premium for outperforming peers across all financial parameters.

“However, we remain cautious regarding higher geographical and low-ticket size concentration and also the bank’s ongoing dispute. As a result, we recommend that Tamilnad Mercantile Bank IPO be rated Neutral,” KR Choksey said.

Securities: Subscribe
Ventura Securities initiated coverage on this bank with a ‘subscribe’ rating and a base case target of Rs 843.60, 1.5 times FY25 book value, representing a potential upside of 60.7 per cent over the next 24 months.

In its bull case scenario, the brokerage has assumed FY25 gross advances for the bank at Rs 52,106.9 crore in FY25 (CAGR of 15.3 per cent over FY22-25) and NIMs of 4.2 per cent (up 40 bps over FY22). In its bear case scenario, it has assumed FY25 gross advances of Rs 44,388.2 crore in FY25, up 9.3 per cent. It sees NIMs of 3.4 per cent, down 42 bps over FY22, in the bear case scenario. The price targets for bull and bear scenarios stand at Rs 965.70 share and Rs 511.30, respectively.

Nirmal Bang
Nirmal Bang said the private bank demonstrated a strong track record of successfully growing and managing a granular portfolio with superior asset quality metrics. TMB, it said, stands out among the old generation private banking peers on most metrics. The brokerage believes TMB can sustain ROA at around 1.5 per cent levels in coming years on the back of stable NIM at around 4 per cent levels and a decline in credit cost to below 1 per cent.

“TMB is being offered at 1.35 times FY22 BV, at a slight discount to peer banks having similar return ratio profiles. Although pending legal issues regarding the bank’s share capital shall continue to be a hangover; considering the quality of business, top quartile earnings profile in the banking industry and reasonable valuations, we rate the issue as ‘Subscribe,'” it said.

Canara Securities: Subscribe for long-term gains
This brokerage said deposits and advances over FY20-22 grew 10.46 per cent and 9.93 per cent CAGR for TMB, which was better than peers. Net profit also grew by 41.99 per cent CAGR FY20-22, which was better than peers.

TMB, it said, monitors the asset quality continuously and aims at further improving on the back of increasing secured advances, diversification across loan book tenures, low concentration across branches and more stringent audit procedures. But the bank’s future growth could be limited subject to pending legal actions on the bank’s equity share capital going against it, Canara Securities said.

“On the valuation front, it is available at P/BVPS of 1.4 times and P/E of 9.10 times as of FY2022 which appears attractive as compared to industry peers. Thus, we recommend subscribing to the issue for the long term,” it said.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)


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