Dhanlaxmi Bank- Free from the PCA Stranglehold

India focused Portfolio Advisory - Exp of 40+years, Das Capital Management and Advisors

Arun Thirumalai

India focused Portfolio Advisory - Exp of 40+years

Das Capital Management and Advisors

Das Capital is a research boutique with an aim to continuously map and plan the investment needs of investors focused on India. We have a six member research team with a combined experience of over 40 years as a part of our investment wing. Our team assisted in the setup of Premji Investments, which was one of India’s first family offices focused to managing Mr.Azim Premji personal wealth. We also serve as a research team to two Indian private equity energy funds “Small is Beautiful” and “KSK Emerging India Energy Fund”.

Equity Bottom-Up

Dhanlaxmi Bank is one of the oldest private banks in India with a majority of its financial interests from the state of Kerala where it gets more than half of its business. The bank suffered financially during FY12-16 (4 years) as it underwent an unprecedented expansion carried out by the previous management during FY09-11 through branch addition and increased headcount, resulting in higher operating expenses and therefore, cost to income ratio increased exponentially when the Indian economy went through a slowdown from FY12-FY15. The new management is scripting a turnaround by putting drivers in place for growth in assets with minimum costs and capital requirements. It has been successful in putting a tight lid on operational expenses as well, while the Bank is on its path on asset quality improvement reflecting from recent improvements in Gross NPA.With low credit-deposit ratio at 57% and a sufficient Capital Adequacy at 12% in FY17, the bank has sufficient space to grow the loan book without resorting to external funding in the medium term.We expect Net profit to grow exponentially at a CAGR of 172% from FY17-19e due to significant improvement in the operating efficiency and asset quality of the bank.The bank is currently trading at a P/BV of  1.19x FY17, 1.09x FY18e and 0.99x FY19e Book Value which we believe is undervalued in comparison to peers.

Dhanlaxmi Bank is one of the oldest private banks in India with a majority of its financial interests from the state of Kerala where it gets more than half of its business. The bank suffered financially during FY12-16 (4 years) as it underwent an unprecedented expansion carried out by the previous management during FY09-11 through branch addition and increased headcount, resulting in higher operating expenses and therefore, cost to income ratio increased exponentially when the Indian economy went through a slowdown from FY12-FY15. The new management is scripting a turnaround by putting drivers in place for growth in assets with minimum costs and capital requirements. It has been successful in putting a tight lid on operational expenses as well, while the Bank is on its path on asset quality improvement reflecting from recent improvements in Gross NPA.With low credit-deposit ratio at 57% and a sufficient Capital Adequacy at 12% in FY17, the bank has sufficient space to grow the loan book without resorting to external funding in the medium term.We expect Net profit to grow exponentially at a CAGR of 172% from FY17-19e due to significant improvement in the operating efficiency and asset quality of the bank.The bank is currently trading at a P/BV of  1.19x FY17, 1.09x FY18e and 0.99x FY19e Book Value which we believe is undervalued in comparison to peers.

Dhanlaxmi Bank- A South Indian Bank on the Cusp of a Turnaround