Friday, August 19, 2016

RBL Bank hardsells IPO with overseas roadshow

ANTIQUE STOCK BROKING

Over the past six years, RBL has invested significantly in building up a strong banking platform involving technology, human capital, network and risk management framework. The key object of the issue is to augment the capital base to support RBL's aggressive growth trajectory and comply with BASEL-III and other RBI guidelines.

Also Read: Pre-IPO market turns hot on RBL


We believe that while the improving proportion of retail and robust growth trajectory does merit premium valuations but in context to muted return ratios and weak liability franchise we see little upside in the near term. We recommend investors to subscribe to the issue only for two - three years perspective. At the upper end of issue price of Rs225per share the bank is priced at 1.75x FY18E book value and 13.8x FY18E EPS. Unexpected deterioration in asset quality resulting from unseasoned loan portfolio, inability to ramp up CASA profile and moderation in growth remains the key risk.

ANGEL BROKING

RBL has invested heavily in technology, branch expansions and manpower; hence the cost to income ratio has been high at 58% for FY16. With growth in business, we expect the bank to avail to economies of scale, which in turn would add to the bottom-line. ROA of 0.9% and ROE of 11.4% seems suboptimal and leaves scope for improvement.

Also Read: IPO review: RBL an interesting transformation to invest

While the new Management has been aggressive in expanding the loan book, it also put in place an efficient risk management system which has led to GNPAs being contained below 1% in the last four years. For FY2016, GNPAs at 0.98% and NNPAs at 0.59% are very much comparable to that of new age private sector banks.

We believe the issue is attractively priced taking into account the valuations at which other mid-sized private sector banks are currently trading. To add to it, given the growth prospects of the bank, we recommend a SUBSCRIBE to the issue.

CSEC RESEARCH

Asset quality remains strong despite expanding the loan book aggressively. With GNPA at 0.98%, the quality of loan book remains strong among the new age private sector banks. Due to heavy investment in branch expansion and manpower, the Cost to Income ratio has remained very high at 58% in FY16. With growth in business, there remains huge scope of improving the Cost to income ratio on availing economies of scale which in turn would improve RoA and RoE.

Also Read: IPO windfall for RBL Bank staff

We believe the post issue valuation at 2.1X P/BV looks attractive considering the strong growth which the company has delivered over the past four years coupled with the breadth of experience and in-depth knowledge of banking operations of Board of Directors which will help them continue to register a sustainable growth. Hence, we give out a subscribe recommendation.

SUSHIL FINANCE

The bank has consistently been growing its Net Income and Net Interest Margins. Further, with an expanding reach in rural market, it has enhanced its Brand image. The bank is planning to grow more with the continuous improvement in modern technology and operational scalability.

Also Read: PE funds set to make three-times return

The return on Equity of the Bank is around 9% which is still quite low, however the trend is upwards. The management of RBL has a rich experience and they have created an excellent platform to springboard into future growth. Asking price of 225 at diluted EPS of 7.91 & P/ E of 28.45, the issue seem reasonably priced. Given the strong management and improving balance sheet one can invest in the IPO for medium-to-long term.

EQUINOMICS RESEARCH

RBL has transformed itself from 2010 under the new management and has delivered superior growth. Profit after tax (PAT) has shown a CAGR of 45.6%, while advances and deposits have grown at a CAGR of 50% each in the last four years. Growth was propelled by some inorganic acquisition like RBS portfolio in 2011 for business banking, credit card and mortgages, while acquiring minority stake in MFI to improve PSL and rural banking.

Also Read: RBS India chief Brijesh Mehra to head RBL corporate banking

The bank’s AUM has grown from RS 4,132 crore in FY12 to Rs 21,229 crore in FY16, a CAGR of 51%. At the upper price band of Rs 225, the stock is offered at 2.4x its pre-IPO book value, and 2.1x the post IPO book value. This valuation is higher than Karur Vysya Bank (current P/BV is 1.4x) and other mid-sized private sector banks. However, given the growth potential, we feel it is worth subscribing to the IPO.

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