DHANLAKSHMI BANK -- contra bet.

DHANLAKSHMI BANK

Dhanlakshmi Bank is a very old bank set up in Kerala in 1927.  Mr Raja Mohan Rao had a majority stake of 37% in 2007 in this bank but due to this there was no professional management to steer the bank in a proper direction. In 2007, a German bank and some foreign funds bought majority of Mr Rao’s stake and they installed the former SEBI chief Mr G N Bajpai to run the ship.

Since the last three years, Dhanlakshmi Bank has grown its deposit base by 4 times and loan base by 3 times.  This has been done under the leadership of Mr Amitabh Chaturvedi  who took over the helm of affairs since Oct 2008 and has transformed the outlook and working of the bank from being a traditional South based bank to a more modern professional outfit.  In these years the net profits have grown only 3% CAGR.

CMP 108 MARKET CAP 915 crores

Fy 11 book value close to  Rs 100 per share.

Outstanding shares are 8.51 crore shares of Rs 10 each.

LAST FIVE YEARS RESULTS

YEAR	07	08	09	10	11
Int earned	248	312	408	534	906
NP	16.14	28.46	57.45	23.3	26.06

EPS FOR FY 11 WAS AROUND 3 PER SHARE.

DIVIDEND FOR FY 11 WAS DECLARED AT 50 PAISE PER SHARE.

LAST SIX QUARTERS RESULTS

Quarter	Dec 09	Mar 10	Jun 10	Sep 10	Dec 10	Mar 10
Int earned	140	150	168	192	250	296
OP	2.8	11.7	9.15	12	17.65	28.6
Provisions	2.75	4	2	8.2	7.9	9.5
NP	1.3	5.6	6	1.62	7.26	11.15

Coming to some data regarding the bank, as on March 11, the bank had a customer base of 16 lac  and the net NPA to advances was down to 0.3%.   At the end of FY 11 the gold loans formed around 34% of total loans and mortgages formed another 22% of total loan book.

For FY 11 the ROE was 4.8% and ROA was low at 0.4% . These are expected to improve significantly in line with increasing profitability of the bank due to stabilisation of operations , higher productivity per employee and modernisation. 

Some advantages that Dhanlakshmi has over peers are

1.       There is lower level of unionization of employees at Dhanlakshmi Bank as compared to Federal Bank or South Indian bank.

2.       Dhanlakshmi Bank is on the cusp of a strong turnaround in fortunes and its key operating parameters.

3.       Lower base effect reduces the systemic risks for Dhanlakshmi Bank.

Some key opportunities for Dhanlakshmi Bank are

1.       its loyal customer base, new and aggressive top management

2.        good growth opportunities in newer geographies, 

3.       technology upgradation leading to acquisition of new customers which were not targeted earlier

4.       Rebranding and marketing are likely to improve awareness about the bank.

5.       Cost efficiency measures implemented by the bank can lead to higher profitability for the bank.

6.       Distribution agreements forged with various fund houses like birla sunlife, SBI MF, Principal MF etc is likely to increase fee based income.

RISKS

1.       Inability to raise capital will necessitate the bank to lower its growth targets. The postponement of QIP  recently has led to a weakness in the stock price currently.

2.       Slowdown in economy may raise headwinds for the bank.

3.       Till date the asset quality of Dhanlakshmi Bank has been good but any deterioration in asset quality might be a risk.

4.       Inability to contain and reduce operating costs would be a risk.

Investment in Dhanlakshmi Bank is a sort of contra investment bet.   If the management achieves its targeted growth and higher operational efficiency due to the measures taken, then this investment could offer good returns.

Conventional wisdom is to look at the poor return ratios of the bank and negative sentiments arising out of postponement of the qip issue and reject the investment hypothesis. But a contra look would entail looking at 2-3 years down the line and consider the investment.   I feel some amount of contra bet is advisable here.  Risk reward for long term investors looks favourable.