Analysts say 'subscribe' to Tamilnad Mercantile Bank IPO: Read to know why

Tamilnad Mercantile Bank's dedicated customer base, strong financial track record, healthy asset quality and reasonable valuation make analysts bullish on its IPO

Private sector lender Tamilnad Mercantile Bank’s (TMB) initial public offer opened for subscription on Monday. The price band of the issue is fixed at Rs 500-525.  At Rs 525, the company aims to raise Rs 832 crore to augment its tier–I capital base to meet its future capital requirements.

The old generation bank primarily offers banking services to MSME, agricultural and retail customers. This lot made up for 88 per cent of the bank’s total advances, as of March 2022.

TMB is based in Thoothukudi, Tamil Nadu, which contributes 76 per cent to its total advances. The bank’s dedicated customer base, strong financial track record, healthy asset quality and reasonable valuation make analysts bullish on its IPO.

Of its 5.08 million customers, 80 per cent have been associated with TMB for a period of over five years. Besides, the bank's return on assets (RoA) at 1.66 per cent for FY22 was the highest among old-generation private peers, as per brokerages. This, they add, is backed by its superior NIM of 4.1 per cent for FY22. 

Key risks: A total of 37.7 per cent of the paid-up equity share capital of the bank is subject to legal proceedings. Apart from this, significant regional concentration in Tamil Nadu, and rising interest rates are other key risks. 

Here’s what top brokerages say:

Yes Securities | SUBSCRIBE

The brokerage said TMB’s asset quality outcomes are at a stable and benign stage with the loan growth performance and outlook being also reasonable. Based on its comparative analysis of 11 mid and small-cap private sector banks, it noted TMB had the lowest gross non-performing assets (GNPA) ratio of 1.7 per cent (as of FY22) vs 1.8-8.7 per cent for its peers. 

Its Net NPA has reduced from 1.8 per cent in FY20 to 0.95 per cent in FY22. Besides, it says that the bank's exposure to corporate loans is low at 12.5 per cent. This low exposure implies a granular loan book leading to greater asset quality stability. Exposure to higher-risk unsecured retail segments is very small with unsecured loans, as a whole, being just 0.83 per cent of the total loan book.

ICICI Direct | SUBSCRIBE for long-term

At the upper end of the price band, the bank is valued at 1.35x P/BV (price to book value-post issue) as on March 31, 2022, which looks reasonable. The bank's total deposits have risen at a CAGR of 10.5 per cent in FY20-22, while its advances grew at 9.9 per cent over the same period. Its current account savings accounts (CASA) contributed 30.5 per cent to total deposits, while retail term deposits contributed 87.1 per cent to total term deposits. 

Nirmal Bang | SUBSCRIBE

As per Nirmal Bang, TMB has demonstrated strong growth while managing a granular portfolio with superior asset quality metrics. It believes TMB can sustain RoA at around 1.5 per cent in coming years on the back of stable NIM (4 per cent) and a decline in credit cost to below 1 per cent. 

Religare Broking | SUBSCRIBE

The bank’s deposit base is consistently growing with a focus on low-cost retail CASA. The bank has adopted a customer-first approach with an emphasis on customer relationships. The financial track record has been good for the company with total income and PAT CAGR of 7.99 per cent and 41.99 per cent, respectively, over FY20-22.

KR Choksey | NEUTRAL

The bank is well capitalized with a capital adequacy ratio of 20.4 per cent, as of March 31, 2022. The company plans to expand its branches once the restrictions of the listing are lifted by the RBI. The current valuation reflects the premium for outperforming peers across all financial parameters. However, we remain cautious due to higher geographical & low-ticket size concentration and the bank's ongoing dispute.