>DHANALAKSHMI BANK (ENAM SECURITIES)

Rejigged board + Refurbished strategy >> Recipe for a bright future

■ Dhanalakshmi Bank (Dhanbank), a Kerala based old private sector bank, promises to be an excellent play with regards to the well defined execution of strategy. This is attributable to a spectacular business (Rs 8165 cr as on March 2009) growth of 43% in the first year of operation
after the entry of fresh talent, new technology, revamp exercise (both strategically & change in composition mix) & differentiated business model for each product & service.

Unfurling the first phase of the growth story!
■ Change is the new mantra -The management has fully leveraged on the current capacity and revamped the bank’s operations through hiring of fresh talent to nearly double from the current 1402 to 2700 employees in FY10. The bank plans to reshuffle loan mix exposure, investment book &
deposit base to yield healthier margins. Capital raising plans is an ongoing process for the bank with Rs 400 cr (Tier II) to be raised over FY10 and FY11 and possible equity issuance in FY11. Care & ICRA have upgraded the credit rating for Dhanbank’s Tier II bonds.

■ Differentiation in business model to achieve excellence - The endeavour to take the bank’s business to new highs demarcates their business model from other private sector banks in terms credit cards, branding exercise through ATM, insurance & MF distribution & AMC.

■ Entering a new gamut of growth trajectory – Dhanbank aims to achieve a pan India status with presence in 600 (currently 180) cities 1000 plus branches in 5 years. The bank endeavours to achieve a 40% plus credit growth (twice the industry growth) through inorganic growth once they
have achieved a firm hold through organic growth.

Risk factors
■ Capital raising exercise could increase the cost component for the bank in Tier II capital & there could be a possible equity dilution in case the bank plans an issuance in FY11. Execution delays could be a dampener to the bank’s aggressive plans of achieving exponential growth.

Valuation
Dhanbank has delivered a strong balance sheet growth (advances of 52% & deposit of 38%) and doubled in terms of profitability in FY09 on account of a low base effect. Going forward, we expect ascending core margin compared to the downtrend expected amongst its peer group. This has been supported by an above industry growth in other income (55% of other income forms a
part of insurance). Going forward, the bank is likely to triple in terms of size with a three year horizon. Considering its strong growth & expansion plans, change in composition of the bank & book accretion driven by profitability plough-back, we initiate a BUY on Dhanalakshmi Bank (which
has traded from FY07 at a historical P/Adj BV range of 1.8 x and deserves premium valuations) with a target price of Rs 198 (2.5x FY11 E adjusted book value & 11.6x FY11E earnings).

To see full report: DHANALAKSHMI BANK